CEE Equity Research June 2008

Special Report A Shiny Outlook! Gold

z Secular bull market still intact z Strongly increased investor interest in 2008 and beyond z Gold is rising due to a structural supply/demand deficit z Central banks will want to achieve a higher degree of diversification of their dollar holdings z Necessary correction following an overbought scenario z First target price 1,200; longterm target: inflation-adjusted all-time- high of USD 2,300 SpecialContents Report

Introduction 2

Supply 5 Primary production: First peak oil, now peak gold? 6 Minig costs 9 Exkursus: The Chinese Gold Rush 11

Secondary supply 13 Central banks 13 Recycling 15

Demand 16 Jewellery demand 17 Exkursus: De-Hedging 19 Exkursus: Gold carry trade and gold lease 20 Investment demand 21 Industrial demand 23

Gold and its specific characteristics 24 1. Gold is both monetary asset and commodity 24 2. Gold as protection against inflation 24 3. Gold as dollar hedge 28 4. Commodity investments and their golden future 30 5. Gold is a scarce and limited resource - example: Pareto distribution 31 6. Gold as diversification - low correlation to other asset classes 32

Ratio analysis 34 Dow Jones / gold 34 Gold / oil 35 Gold / silver ratio 36 Gold / HUI (Amex Gold Bugs Index) ratio 37

Gold mining shares 38 Amex Gold Bugs Index 38 Philadelphia Gold & Silver Index 39 Selection criteria of gold shares 42 Ressource 42 Reserve 43 Further tendencies of consolidation in the gold mining sector 44

Technical analysis of the gold sector 47 Seasonality 47 Comparison of the current correction with the end of the bull market in 1980 49 Sentiment 50 Short-term analysis 53 Long-term analysis 54

Conclusion and outlook 55

Special Report Gold, June 2008 Page 1 SpecialIntroduction Report

Positive setting for gold The chart underneath is a prime example of the impressive performance of high- investments to be quality gold shares even in a volatile market scenario. This cross section is not just prolonged a list of top-performers, but the result of the objective selection of gold mining shares that have shown to perform clearly above average over a long period of time. Since we rated the industry environment very favourably in our previous gold report of May last year, some of these shares have already been on our weekly recommendation list for months. This latest gold report will now illustrate in detail why the sector should remain attractive for a good number of years more. This sector analysis provides the interested investor not only with a comprehensive body of know-how as basis for decision-making in the gold sector, but also with various additional and extraordinarily attractive investment ideas.

Selected gold stocks vs. MSCI world vs. gold price

250 230 210 190 170 150 130 110 90 70

05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07 01/08 02/08 03/08 04/08 05/08

Eldorado Gold Agnico Eagle Goldcorp MSCI World Gold Bullion U$/Troy Ounce Source: Datastream

Gold passed its nominal Since our previous gold report of May 2007 the gold price increased from USD 670 all-time-high as per ounce to beyond the infamous USD 1,000 per ounce threshold, meaning that the expected; yellow precious metal exceeded its nominal all-time-high of USD 850 per ounce of next target: inflation- 1980. On 17 March a new high was set at USD 1,034. Since then the price has adjusted high of USD corrected considerably, but in a long-term perspective this has been an overdue and 2,300 technically necessary correction within the setting of a secular bull market. However, at USD 2,300 per ounce the inflation-adjusted high is still a long way off.

The current gold rush is based on a number of factors: One of the most important ones is the falling confidence in the American economy. The subprime crisis has developed into a liquidity and credit crisis and subsequently grown into a confidence crisis and a crisis of the system itself. The chronically weak dollar, the credit crisis originating in America and concerns over strongly rising inflation and the exploding growth of the money supply have caused the investors to feel uneasy and channel billions of funds into precious metals. Whereas gold investments had been ridiculed as "relic for cowards" until very recently, their stability and safe haven features were appreciated in the event. The Financial Times for example headed one of its articles Negative real interest on 7 January 2008, "Gold is the new global currency". This did come as a surprise, rate as a base for further seeing that FT had traditionally been quite critical on gold. After what started out as increases of the gold US property crisis had developed to a global financial crisis leaving marks on the real price economy, the US central bank had no option but to react by massively cutting rates. This has led US real interest rates onto negative ground, which should form a base for further increases of the gold price.

Special Report Gold, June 2008 Page 2 IntroductionSpecial Report

In addition, the following factors are responsible for the gold bull market:

z Strong increase in jewellery demand from India and the Middle East z High inflows into exchange traded funds (ETFs) z Negative real interest rates in USA, China and other countries z Volumes sold by central banks are falling z Continued decrease in mining output z Repurchasing of old forward hedging contracts (producer de-hedging), i.e. the gold supply on the market is cut further z Generally strong commodity markets, particularly oil z Increasing geopolitical risks

While equities used to outperform commodities clearly for 20 years, this situation has reversed since the year 2000. The current turbulences on the stock exchanges have lent support to this paradigm: Whereas the established global indices have largely lost value since 2000, gold has been gradually booming.

Stock indices vs. gold since 2000

Source: Thomson Datastream

Special Report Gold, June 2008 Page 3 IntroductionSpecial Report

Precious metals remain The bull market in precious metals continued throughout 2007 and has shown no on upward path signs of letting up in 2008. Platinum and ruthenium have set new all-time-highs along with gold, and silver has seen the highest price in many years.

The following graph shows the development of the most important precious metals since 2000 (standardised at 100).

Precious Metals since 2000 in USD Precious Metals since 2000 in USD 1000 1000

900 900

800 800

700 700

600 600

500 500

400 400

300 300

200 200

100 100

0 0 2000 2001 2002 2003 2004 2005 2006 2007 rebase Silver Fix LBM Cash Cents/Troy ounce to 100 at 01/01/2000 rebase Gold Bullion LBM U$/Troy Ounce to 100 at 01/01/2000 rebase Platinum,Free Market $/troy oz to 100 at 01/01/2000 rebase Palladium U$/Troy Ounce to 100 at 01/01/2000 rebase MB-Rhodium Matthey $/Troy oz to 100 at 01/01/2000 Source: Thomson Datastream Source: Thomson Datastream

Mining output still The gap between supply and demand continued to widen last year. Mining output fell receding, gap between to 2,476 tonnes, i.e. the lowest amount since 1996. Central bank sales were up only supply and demand can slightly on the previous year in spite of the higher price, and the same is true for the only be compensated supply of recycled gold. On the demand side, speculative demand increased sharply by price increases last year, especially in the second half, and jewellery demand as well as industrial demand was robust, but might come down a bit in 2008. On top of that, central banks in Russia, China, and the Arabic region will want to gradually diversify themselves more out of their dependence on dollars. Even if only a small percentage of the (petro) dollars gets funnelled into gold investments, this will trigger another price leap. 2007 was also the first year where private persons owned more gold than central banks in total.

We consider this situation supportive to the scenario we described last year, and expect the gold price to rise further. In this report we will address the supply/demand situation, specific features, the technical picture as well as the sector of gold mining shares.

Special Report Gold, June 2008 Page 4 SupplySpecial Report

The supply on the gold market is made up by the following components:

I. Primary supply (= Mining output) II. Secondary supply a)Recycling/scrap gold b)Disinvestment i. Central bank sales ii.Gold lease, supply from hedging transactions (difficult or impossible to quantify)

Gold supply 23%

Scrap Gold Central Bank Sales Mine production 13% 64%

Source: GFMS, company data, own calculations

Total annual demand for gold is around 3,600 tonnes, but only close to 2,450 tonnes are produced by mines every year. The shortfall is compensated by central bank sales and recycling (so-called scrap gold). While central banks used the high gold price in the second half of 2007 to sell some of their holdings, the increased supply was eaten up by the continued fall in mining output and the lower supply of recycled gold. The demand side was stronger than in the previous year across the board, which means that the gap between supply and demand widened in 2007.

Supply structure 2005 - 2007

3000 2550 2481 2476 2500

2000

1500 1107 937 1000 886

Tons 662 485 500 367

0 -86 -373 -400 -500 2005 2006

-1000 2007e

mine production de-Hedging central bank sales recycling

Source: GFMS, company data, own calculations

Special Report Gold, June 2008 Page 5 SupplySpecial Report

Primary production: First peak oil, now peak gold?

Production continues to In 2007 gold production dropped to the lowest value in eleven years. The actual output decline, the market of 2,476 tonnes (-0.4% on the previous year) fell short of the expected amount of share of the "Big Four" 2,485 tonnes. is gradually sliding Gold production is declining or stagnating, respectively, in eight of the twelve most important gold-producing nations which in total account for more than 50% of global primary supply. Among those are the traditional "Big Four" gold-producing countries, Canada, Australia, USA, and of course South Africa, all of which are faced with stagnating or receding capacities.

Mine production in tons

3,000 PEAK ?

2,500

2,000

1,500

1,000

500

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e 2010e

Source: GFMS, company data, own calculations

Reasons for the falling mine production:

z During the gold bear market of 1980 to 2000 many of the smaller goldmines were closed, and hundreds of gold shares were delisted. Due to the large lead times of five to eight years, production capacities cannot be increased on the spot. Decades of negligence in terms of investment in exploration, human resources, conveying machinery, and materials will presumably cause a substantial time lag, which means that we expect primary production to pick up only from 2011.

z Because of dramatically increased exploration and development costs the development of a mine represents an enormous entrepreneurial risk. Junior explorers have been short of financial partners over the past years; therefore new mining projects were mainly taken on by majors (large, globally established mine operators).

z The easily and inexpensively minable resources are nearly exhausted, much like in the case of oil. The mining of low grades as well as ore situated in great depths, tends to be unfeasible for technical or economic reasons. For example, for each gram of gold mined, an average of one tonne of rock has to be processed (open pit method).

z Canada and Australia in particular have passed more stringent environmental laws which are supposed to mitigate the ecological consequences of gold mining. This is why permissions for new projects have been delayed and have become much more costly. The highly toxic cyanide solutions that wash the gold out of their rock substratum are particularly dangerous, leading to poisonous drinking water and in the event to dying fish and consequential damage to human life.

Special Report Gold, June 2008 Page 6 SpecialSupply Report

z The service industry catering to gold mining is currently also running at full capacity. The laboratories analysing rock samples as well as qualified personnel awarding certifications (e.g. NI 43-101 in Canada) are fully booked for years.

z Judging from the current projects, the strongest output growth will be coming from China, West Africa, Russia, and Central and South America. The political risks in countries such as for example Peru, Indonesia, Ecuador, Zimbabwe, and most recently Venezuela further curtail the supply.

The following graph highlights the massive time lags and bottlenecks in rock mills, diggers, and other equipment required in the mining process.

Delays for mining equipment

Source: Rio Tinto plc

Legal amendments in On 1 November, 2007, the Hard Rock Mining and Reclamation Act was passed in the USA could weigh the USA. This Act will cause a number of elementary changes in the American heavily on the primary mining industry. Among other things, a 4% royalty tax on existing production and supply an 8% tax on new exploration projects were introduced. On top of that, additional environmental standards (applicable to existing projects) were adopted. The substantial costs of said standards would call into question the profitability of numerous projects. The proposed alterations will have to be passed by the Congress first, so there is still room for modifications. However, the Act should have severe effects on the US mining industry in any case. It would drastically increase production costs, make things even more difficult for new projects, put a lid on exploration projects and eventually decrease US mining output.

Gold producers such as Barrick Gold surprised the markets with the statement that we would see a Barrick Gold and considerably higher gold price within the next five to seven years, given that the Newmont Mining expect decline in mining output would be much more pronounced than previously expected. a further decline in The statement came as a surprise because Barrick Gold had been known for its primary production and cautious forecasts of the gold price. CFO Sokalsky expects a decline in mining a considerable increase output of 10 to 15% over the next five years. This bandwidth has been confirmed by in the price of gold all other major producers, as they all expect mining output to decline. Pierre Lassonde of Newmont Mining pointed out that there had not been any discoveries of more than 30 million ounces in many years, which is why he, too, expected falling primary output over the next five to ten years.

Special Report Gold, June 2008 Page 7 SupplySpecial Report

South Africa as South Africa can be used as prime example of the problems in the gold industry. In convincing example of 1970 the country was producing 32 million ounces of gold a year, or more than two the problems in the thirds of global production. gold mining industry Mine production 1970 Australia: 1.30 % Others: 8.60 %

USA: 3.70%

Sowjet Union: 13.70 %

Canada: 5.10 % South Africa: 67.70 %

Source: Goldsheetlinks.com

Since the beginning of the 20th century, South Africa had been the leading gold producer in the world. Due to shrinking gold deposits the country had to yield its no.1 position, which it had been hanging on to since 1905, to China last year. Of course precious metals continue to play a central part in the South African economy: Mining accounts for more than 5% of the country's GDP and employs almost 10,000 people.

Since 2002 production has slumped by almost a third. 2007 saw the lowest production since 1922. The decisive factor in this development was the aging of the gold deposits, forcing mine operators into ever deeper and more demanding drilling. Currently these drillings take mines down to depths of 4,000 metres in the attempt to find new deposits. However, these deposits tend to have a lower yield and are thus much more costly to mine than the now exhausted deposits used to be. The average gold content is currently about 4 grams per tonne of rock, whereas in 1966 the average content in South Africa was 16 grams per tonne.

Mine production 2007 South Africa: USA: 10.40 % 11.10 %

Australia: 10.30 China: 11.30 % %

Indonesia: 7.00%

Peru: 6.90 %

Others: 32.90 % Russia: 6.20 %

Canada: 3.80 % Source: Goldsheetlinks.com

Special Report Gold, June 2008 Page 8 SpecialSupply Report

As the rock is hot in such depths, the mining operation itself is much more expensive. The complicated mining methods have taken their toll. Dozens of mines were closed in Johannesburg after numerous miners died having been exposed to a poisonous gas leak. Up to 200 miners die every year as a result of drastic safety hazards. Energy bottlenecks lead to the temporary closure of some mines. The national electricity supplier Eskom has reported the worst supply shortages for decades, as a result of which the electric grid has to be shut down for several hours a day. According to Eskom the end of these shortages is not in sight yet, and further supply problems are envisaged for the next five to eight years. Johannesburg and the region of Gauteng are the most severely affected areas - Gauteng being the centre of the South African gold and platinum production. Anglo-Gold Ashanti, Gold Fields, and Harmony had to suspend production temporarily, and the world's largest platinum producer, Anglo Platinum, had to halt parts of its mining operations for a while too. Gold Fields now plans to axe almost 7,000 employees, i.e. more than 13% of its total staff.

The following overview shows the shifts of gold production over the past two decades in terms of countries.

Gold production 1987 vs. 2007

1987 2007 Change China/Mongolia 73 292 301% Ghana 64 234 266% Australia 217 574 164% South America 206 422 105% North America 271 348 28% Russia 296 292 -1% South Africa 607 253 -58% Total 1734 2415 + 39,2 % Source: Wellington West Capital Markets Inc.

Mining costs

Mining costs per ounce have increased nearly as much as the gold price; gold mining is becoming more technically advanced and thus more expensive

Gold mining is a process involving advanced technical engineering. Oversized drilling machinery drives tunnels into the rock, which is then transported to industrial plants on kilometres of conveyor belts. Gigantic mills pulverise the rock, and centrifuges hurl the gold from the rocks. Chemical baths then bind the gold, and electric current does away with the impurities.

In the course of the past couple of years the prices of energy and steel have risen dramatically. The energy costs in the open-pit method (surface mining) for example account for up to 40% of total mining costs. On the procurement front (i.e. services and equipment), gold producers are up against an increasing degree of competition from other mining companies. Buying a large rock mill would typically involve a waiting period of up to four years. Because of twenty years of gold bear market this area also suffers from a lack of human resources. The sharp increase in mining costs also results from lower grades of rock (whose mining is more demanding and thus more costly), increased investment requirements, and higher staff costs.

Special Report Gold, June 2008 Page 9 SupplySpecial Report

The following chart illustrates the sharp increase in the most important cost factors in gold production.

Production costs - change since 2002

2 1.9 1.8 1.7 1.6 1.5 1.4 1.3

Index (2002 = 1,00) 1.2 1.1 1 0.9 2002 2003 2004 2005 2006 2007e equipment steel staff total

Source: Bloomberg, own calculations

Mining costs increased The sharp increase in mining costs is also obvious on the following chart. The average by 18.5 % in 2007 cash costs per ounce produced in 2007 had increased by 18.5% on the year. Mining costs rose most strongly in Canada (+32%), followed by the USA (+27%), and Australia (+21%). The increase of South Africa (+11%) was below average, but the country had already recorded massive increases over the previous years.

Increase in production costs per ounce in 2007

35% 32%

30% 28%

25% 21% 20% 19%

15% 11% 10%

5%

0%

Canada USA Australia World South Africa

Source: company data, own calculations

This means that gold mining today is hardly any more profitable than in periods of lower gold prices. This applies particularly to countries where the local currency has appreciated against the dollar (e.g. Australia, Canada).

Special Report Gold, June 2008 Page 10 SpecialSupply Report

Falling primary Therefore primary production should continue to fall, given that the number of new production forecast confirmed reserves cannot make up for the number of mines slated for closure until until at least 2011 at least 2011. Due to the sharp rise in costs the higher gold price is not likely to trigger an increase in exploration projects. This represents one pillar of our positive gold price scenario.

Excursus: The Chinese Gold Rush

The price boom is For the first time since the end of the 19th century, South Africa is not the world's fuelling the production largest gold producer anymore. In 2007 the Chinese gold production increased to 276 boom tonnes (+12%), while South Africa produced 272 tonnes (-8.1%). Many mines managed to double their capacities, which was above all due to low environmental standards and massive exploration activities in previous years. A number of junior miners launched production last year (China Gold Mines, Jinshan Gold Mines, Sino Gold Mines). According to the China Geology Survey Bureau (CGS) five large mines took up production in 2007 with total reserves of 650 tonnes of gold. Liquidity continues to flow into the mining sector at a massive rate; the mining sector has partially replaced the property sector and the equity market as boom sector. The standards and authority permits are less complex, which means that projects can be put into action much more quickly than in the traditional "Big Four" gold mining regions.

The most important authority on the Chinese gold sector is the China National Gold Group Corporation (CNGC). It holds the mining rights in seven of the eight most important mining regions. The CNGC owns 450 mines in China, and recently the corporation has become a more active player abroad for example by acquiring a 42% stake in Jinshan Gold Mines, which is listed in Canada. In total China has almost 1,300 goldmines and 1,000 mining companies. The sector is currently going through a consolidation phase.

Chinese gold market is Between 1949 and 1982, it was illegal to personally own gold in China, and up until gradually deregulated 1998 it was still next to impossible for private persons to buy gold. Upon and developed recommendation by the World Gold Council and as part of the catalogue of measures for joining the WTO in 2001, the gold market was gradually deregulated. Since the formation of the Shanghai Gold Exchange in 2002, the trading volume of gold and gold-based products has increased considerably, which in turn stimulates demand. Before that time, the entire volume of gold produced had to be sold to People's Bank of China (Chinese central bank). Since January 2008 gold futures have also traded at the Shanghai Futures Exchange. Demand increased by 20% to 326 tonnes in 2007. This means that China has overtaken the USA and is the second-largest customer worldwide behind India. The abolishment of the 17% VAT on purchases of gold, should it happen, would further stimulate trading.

Special Report Gold, June 2008 Page 11 SpecialSupply Report

The following graph shows the mine production in China, Russia, and Uzbekistan in millions of ounces. Whereas Russia's primary production has been on a gradual decline, China has managed to increase its production from 0.2 million ounces in 1980 to 9 million ounces most recently. Production China, Russia, Uzbekistan

Source: Goldsheetlinks.com Russia and China as net However, only a small part of the gold produced makes it onto the open market. importers China, which has recently become the world's largest gold producer, is net importer. So is Russia, the world's fifth-largest producer. This means that the production of the world's largest and the world's fifth-largest mining nations never leaves the country.

Special Report Gold, June 2008 Page 12 SpecialSecondary Report supply

Central banks:

Structural shortage can The supply shortage was only compensated through massive selling by the central only be compensated banks in recent years. This means that the central bank sales are essential to by central bank sales balance the disequilibrium of supply and demand. Between 1970 and 1980 the positioning of central banks was relatively neutral. Only since the end of the Cold War have most European central banks been gradually selling their gold.

Central Bank Gold In order to regulate gold sales, the first gold agreement was signed in 1999. Within Agreement (CBGA) the framework of the Central Bank Gold Agreements (CBGA), the 15 signing central regulates central bank banks and the ECB agreed to sell a certain amount of gold per year while the contract gold sales was in force (a contractual year starts on 27 September). It was also stipulated that gold would remain an important element of global monetary reserves. The first agreement, CBGA I, came into force in September 1999 and was binding for the following five years. The participating banks committed themselves to selling a maximum of 400 tonnes of gold per year. On top of that the banks agreed not to expand the volume of gold leases, gold futures, and gold options for five years. The agreed-on amount of a total of 2,000 tonnes was adhered to, mainly on the back of the sales of the Swiss central bank (SNB). After the chairman of SNB had stated in 1997 that around half of the gold reserves, i.e. 1,300 tonnes, were not relevant to the monetary policy of Switzerland anymore, 1,170 tonnes were sold within the period of CBGA I, and the remaining 130 tonnes in the following year.

Uncertain future after The current agreement CBGA II expires on 27 September 2009. The maximum sales CBGA II expires volume was increased to 500 tonnes under this agreement. There are currently no plans for a new agreement, which means that the period of accorded central bank selling may be over in 2009. This situation might lead to a significant decrease in supply on the global market. However, the common practice of balancing chronic budget deficits by selling gold should remain the same. Banca d'Italia for example was told to sell parts of its gold reserves by the Italian government.

The following overview shows that the share of gold as part of total central bank reserves is much higher among the CBGA banks than in the rest of the world.

Gold as % of central bank reserves

60%

50%

40%

30%

20%

10%

0% Total Eurozone CBGA1 CBGA2

Source: AMF, www.gold.org, central bank information

Special Report Gold, June 2008 Page 13 SpecialSecondary Report supply

2008 & 2009: Major In the third year of the agreement a total of 476 tonnes were sold, with Spain, selling programmes are Switzerland, and France among the major sellers. In the fourth year (which started over. Will the 500 on 27 September, 2008) the French and Spanish central banks will remain very active tonnes limit be fully on the selling side. At the end of March, the World Gold Council reported that used? Switzerland, one of the largest sellers of recent years, was approaching the final stages of its most recent selling programme of 250 tonnes. In the meantime Germany announced that it would not sell any more of its gold. A lot of countries have already finished their selling programmes, therefore it would not surprise if the upper limit of 500 tonnes were not fully exhausted in 2008 and 2009.

Dollar creditors with Globally the average share of gold in terms of total reserves of the central banks is constant holdings, slightly below 10%. The established Western industrialised nations hold at least share of total reserves 50% of their reserves in gold, whereas the portion of gold in terms of total reserves still small is very small in emerging economies such as China, Russia, and India. The largest dollar creditors (e.g. Japan, China) as well as commodity producers (Russia, Saudi Arabia) have kept their gold holdings constant or have increased them, respectively. Since 2000, China has drastically raised its holdings, but the share remains low in terms of total reserves, as the following chart outlines:

Global central bank reserves 100

90

80

70

60

% 50

40

30

20

10

0 Italy USA India Spain China Japan Libyen Turkey France Austria Poland Algeria Taiwan Greece Belgium Sweden Portugal Thailand Lebanon Germany Romania Russland Venezuela Philippines Switzerland Netherlands South Africa Great Britain Saudi Arabia Source: AMF, www.gold.org, central bank information

Reserves heavy in People's Bank of China (PBoC, Chinese central bank) already announced in 2005 dollars continue to be that it would increasingly resort to gold bullions in protecting its foreign exchange diversified by gold reserves and its own currency. After all, China only holds slightly more than 1% of its USD 1.3bn of foreign exchange reserves in gold, whereas Germany's comparable ratio is 60%. PBoC is in good company as far as its scepticism vis-à-vis the dollar goes. The central banks of Argentina, the Ukraine, South Africa, numerous Arabic countries, and Russia have all announced they intend to diversify in a similar fashion. The Russian authorities said they would more than double the share of gold in terms of total reserves from 4.2% to 10%. This is equal to 500 tonnes, or three times the annual Russian production. Countries outside the CBGA agreement will probably continue to buy in 2008, an assumption confirmed by the third and fourth quarter 2007 purchases in spite of the high price level.

Special Report Gold, June 2008 Page 14 SpecialSecondary Report supply

Changes in central bank holdings 2000-2007 in tons

300 200 100 China Qatar Japan Ukraine

0 Argentina -100 Venezuela -200

-300 Brazil ECB

-400 Uruguay Austria Germany -500 Spain Philippines -600 Portugal Tons -700 France

-800 Netherlands -900

-1000 United Kingdom -1100 -1200 -1300 -1400 -1500 Switzerland Source: AMF, www.gold.org, central bank information IMF on the selling side In summer 2006 massive sell-offs by central banks pushed the price down from USD for the first time since 720 to USD 540 within a matter of weeks. In periods of high budget deficits the high 1980? gold price tempts to use sales proceeds in balancing out budgetary shortcomings. This might soon lead the IMF to sell some of its gold reserves as well. Currently its reserves stand at 3,217 tonnes. This means that the IMF owns the third-largest gold reserves behind the USA and Germany. The Fund already sold 1,600 tonnes, i.e. one third of its holdings, in the gold bull market between 1976 and 1980 in order to "reduce the significance of gold in the international monetary system". In view of an annual IMF deficit of more than USD 400mn Morgan Stanley recommended to sell parts of the gold reserves.

Since its incorporation the IMF benefited from granting loans to emerging nations, which has most recently become obsolete due to the commodity bull market. The G7 recently agreed on the sale - after the USA had surprisingly given its consent. The IMF will sell a total of 403.3 tonnes of gold for around USD 13bn. However, the actual execution of the transaction hinges on a modification of the bylaws, which 85% of the members have to agree to. Details have not been made public yet, but the transaction will probably be settled over the counter, with the gold likely headed for Asia or Russia. The immediate reaction to the news was very positive with the gold price down to USD 921, but ETFs bought twelve tonnes on the very same day.

Recycling

The sharply increased gold price leads one to assume that the volume of recycled gold (scrap supply) would have risen considerably. However, this was only partially so. There was hardly any selling pressure noticeable, particularly not in price- sensitive regions such as India or the Middle East. This confirms the assumption that in general the gold price will remain on an upward path and sales are thus best avoided. By contrast, the recycling supply had risen notably after the strong gold price hike in 2006.

Conclusion Supply:

The supply side The supply came down again last year, and this trend is likely to continue over the suggests further gold coming years. The falling primary production, receding central bank sales, and the price increases only negligibly higher recycling supply should offer a solid base for future gold price increases.

Special Report Gold, June 2008 Page 15 SpecialDemand Report

Demand breaks down into two categories:

z physical demand (jewellery, industry) z speculative demand (investment demand)

Gold demand 20%

Jewellery Industrial Demand Investment Demand 17% 63%

Source: www.Gold.org, EB research

Robust growth of The demand side of the gold market has shown a clear upward trend in the past demand in all three decade. Each one of the three most important areas, i.e. jewellery, industry, and areas investment, has recorded substantial gains. The tendency towards diversification among investors, the sharply rising demand from emerging markets, and the rising number of industrial uses of gold have been primarily responsible for this scenario. The price shock last year, when gold increased by more than 45%, did cause demand from the jewellery industry to shrink, but failed to result in a major slump of any sort. Besides, this decline was largely compensated by the substantial increase in investment demand.

Another factor of the soaring gold demand is the high internal and external deficit of the USA that can only be sorted out through the adequate depreciation of the US dollar. Especially Asian nations, posting high current account surpluses and holding the majority of their foreign exchange reserves in dollar-denominated assets, have gradually increased the gold portion in their portfolios.

Exchange Traded Funds Physical demand over the past few years has mainly been driven by emerging with substantially economies in Asia, the Arabic region, and Russia, while speculative demand has stepped-up volumes benefited mainly from the success of exchange traded funds (ETFs). Physical gold held by ETFs increased by almost 50% between November 2006 and 2007. Institutional investors were the main buyers, whereas demand from retail investors edged up only by a bit.

Demand 3000 2707 2426 2500 2283

2000

1500 Tons

1000

412 421 441 500 390 208 260 431 458 465 0 2005 2006 2007e

jewellery industrial demand ETF's investment demand Source: EB estimates, GFMS

Special Report Gold, June 2008 Page 16 DemandSpecial Report

Total gold demand last year increased by 4% (in tonnes) and by 20% in dollar terms to almost USD 80bn. This means that demand increased for the fourth year in a row. The three most important areas, jewellery, industry, and investment, posted consistent growth rates each. Jewellery demand was on the weaker side during the second half of the year due to the higher gold price, but this was more than made up for by the increase in investment demand.

Jewellery demand

Jewellery demand 2007: The gold demand from the jewellery industry currently accounts for 63% of total Increasing demand in demand and is thus the most important influencing factor for the gold price. Both spite of substantial speculative demand and jewellery demand remained on their upward trend due to the price hikes globally rising level of wealth. Total jewellery demand increased by 4% in 2007, but the geographic differences were massive: Demand in China increased by 23% to 326 tonnes, whereas the USA (-14%) and Europe (avg. -8%) recorded falls. This means that for the first time China has replaced the USA as second-largest gold consumer. The demand from Saudi Arabia, Turkey, Egypt, and the United Arab Emirates was growing above average as well, whereas India recorded slightly below average growth rates.

Jewellery demand change YoY

26% 24% 22% 20% 18% China 16% Saudi Arabia Turkey 14% Egypt 12% UAE 10% World 8% India 6% 4% 2% 0%

Quelle: GFMS, own estimates

High gold price In the fourth quarter 2007, jewellery demand fell by 17% in comparison with the same dampens demand in the period of 2006 due to the high price level. Especially India, the world's second-largest fourth quarter 2007 and gold importer, displayed some price sensitivity and saw demand slump by 64% in the first quarter 2008 comparison with the reference period of 2006. In the UAE, demand came down by close to 30% in the fourth quarter. We can see subdued buyers' interest in 2008 too. Gold sales in Dubai have shrunk by 15%. Dubai is considered one of the most important trading spots for gold and jewellery worldwide and mainly caters to Arabic and Indian demand.

India showed its price- Due to the recent massive price hikes, jewellery demand in India is probably set to sensitive side fall more substantially. The price for 10 grams of gold passed the infamous threshold of 10,000 rupees. However, buying has only been postponed, not scrapped altogether, which should make for good support in the case of (possible) price declines. Within the framework of the ongoing correction of the gold price, sales in India have recovered quite a bit. This means that the price may have found support at around USD 850 through physical demand, and the investors seem to be getting used to the higher price levels. On top of that, recycling supply remained constant, so in the long run further price increases are likely.

Special Report Gold, June 2008 Page 17 DemandSpecial Report

To Indians, gold means As a result of the rapid economic growth, the appreciation of the rupee against the jewellery, investment, dollar, and the constant increase in purchase power, the demand for gold has been and life insurance at the on a continuous upswing for the past years. In 2007 India imported more than 900 same time tonnes of gold which equals around one fifth of the entire world's gold transaction value. Indians own a total of almost 15,000 tonnes of gold, i.e. about one tenth of the worldwide gold reserves. The special relationship Indians have to this precious metal is also deeply rooted in Hindu culture. In India, gold is traditionally used as dowry for brides - called "stridhan" - because women are officially barred from owning land or other property. Although gold is held in the form of jewellery, it has more of a monetary sort of value, because it protects ("insures") the woman's existence should the marriage break up. Gold is therefore a social safety net.

Estimated jewellery demand for the Indian „Wedding Season“ 2009

Source: www.gold-eagle.com

Outlook 2008: slight The high prices might weigh on jewellery demand in 2008. We therefore do not expect decrease in jewellery the growth rates of previous years to be achieved this year and forecast jewellery demand expected, long- demand to the tune of 2,200 to 2,400 tonnes. However, the growing population and term scenario still the rising disposable income in the emerging countries should support demand in positive the long run. Any significant slump in jewellery demand from China and India (in conjunction with further declining equity markets) would of course depress the gold price. This represents the largest downside risk in our otherwise optimistic gold price scenario.

Estimated Jewellery demand in 2008

Germany

UK

Italy

Indonesia

Egypt

UAE

Saudi Arabia

Turkey

USA

China

Inda

0 100 200 300 400 500 600 700 demand in tons Source: GFMS, own estimates

Special Report Gold, June 2008 Page 18 SpecialDemand Report

Excursus: De-hedging

What does producer Since mine operators have to invest heavily in exploration and mining, they sell some hedging and de- of their future gold production forward - the largest risk involved being that the hedging mean? expected cash flows from the gold production differ from the forecasts. This may happen if a) not enough gold is produced or b) if the gold price is below the expected value. Mine operators can only influence the former and have to plan far ahead, so they usually sell their own production forward. This is called producer hedging. The premature cancellation of these long-term supply contracts is called de-hedging.

De-hedging increases During the price slump that started in 1980, production was sold at cost so as to physical demand ensure the existence of the company. However, today these long-term contracts weigh heavily on the balance sheets as the companies cannot benefit from the rising gold price or because the supply contracts have to be terminated at high costs. On top of that, the majors have full hedge books and further curtail the gold supply on the market, thus widening the gap between supply and demand. Between 2001 and 2006 close to 2,000 tonnes of gold were bought back as part of de-hedging programmes. We expect this volume to decline because the largest positions have now been cancelled.

Forward contracts account for the lion's share in hedging, i.e. the forward transaction is obligatory for both sides. Put and call options are more speculative. This way producers can protect themselves against falling gold prices (put option): they achieve a fixed price even if the spot price is lower at the particular point in time. The bank that writes the put has to borrow the respective amount of gold from the central banks and sell it immediately on the spot market.

Unhedged producers In periods of rising gold prices, the shares of unhedged companies will of course benefit more from the perform much better (please refer to the Amex Gold Bugs index). Barrick Gold (who gold bull market closed the hedge-positions earlier than most of it's competitors) rose to become the world's leading gold producer through numerous acquisitions (e.g. Normandy, Placer Dome), whereas hedgers such as AngloGold and Newmont Mining lost large parts of their market share. The following chart shows the outperformance by unhedged companies in periods of rising gold prices:

Hedged vs. unhedged gold stocks

Source: Thomson Datastream

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Excursus: Gold-carry trade and gold lease

Gold lease since the Gold leasing became common practice in the 1980s when central banks were beginning of the 1980s leasing out their gold reserves for 1 to 2% of interest per year to commercial banks (mainly JP Morgan Chase, Goldman Sachs, UBS, and Citibank) - not bad, considering this particular asset had not yielded any interest up until then. The income is then reinvested into bonds. The banks in turn lease the gold out to mines which sell the leased gold and use the proceeds to fund capital investments for example in conveyors. These investments enable the mines to continue producing gold and thus to settle their gold debt with the central banks, among other things. It is customary in the case of the gold lease to return the leased gold at the end of the maturity, and the mines also have to pay interest for leasing the gold. Since the debt is denominated in gold rather than currency, this procedure basically constitutes a hedge against falling gold prices for the mines. However, it also means that they will not benefit from rising prices. A so-called bullion bank acts as intermediary between both parties and receives a commission for every successful transaction set up. This carry trade works of course only as long as the low-interest asset class does not increase.

Gold lease positions This way the liquidity in the gold sector improves and the chance for more according to GATA at transactions, especially derivatives, increases. That said, central bank gold leasing 10,000 to 15,000 tonnes has also lead to a considerable distortion of the supply/demand ratio. The supply has of gold been artificially inflated, derivatives (e.g. swaps, forwards, and options) have created short positions that are based on central bank gold and thus depress the price and are keeping it artificially low. As the process of the gold lease would suggest, it is not the same gold that is returned, but newly mined one. This makes it possible for the mine initially to sell the leased gold on the market, which boosts the supply and has negative effects on the price. Due to the external influence during this period the gold price is exposed to manipulation. In order to prevent this situation from occurring and to promote the transparency of gold reserves the IMF is planning to modify the reporting regulations for central banks. Until now it has taken more than a glance at the balance sheet to figure out how much gold is actually held by the central bank and how much has been leased out. But according to the modified regulation banks would now have to clearly report the volume of gold leased out so as to leave no doubt about who is doing what. According to calculations by the Gold Antitrust Action Committee (GATA) central banks have currently leased out gold reserves to the tune of 10,000 to 15,000 tonnes to banks. Any quick settlement of these short positions would probably push the gold price to far higher regions.

Gold-lease rates 1997-2008

Source: www.sharelynx.com

Special Report Gold, June 2008 Page 20 DemandSpecial Report

Carry trades are The gold carry trade is a risky form of gold lease. In this case banks do not go through depressing the gold mines to hedge their position but sell the gold on the market and invest the proceeds price mainly in bonds. This means that the banks make their profit from the interest rate differential. The dependence on the development of the gold price represents the risk involved in this procedure. During periods of decrasing gold prices investment banks benefit massively from this kind of transaction since falling prices mean profits for the banks. On the other hand, an increasing gold price results in losses for the banks. This conflict of interest between the investors who speculate on rising prices and the banks which hope for the opposite gave rise to the theory of the so-called gold price manipulation, first proposed by Dimitri Speck. According to Speck the Fed has intervened frequently on the American gold market since 5 August 1993. The manipulations could be proven because interventions would occur specifically on key fixing and opening dates.

Investment demand

Commodities are Investment demand in 2007 was ambivalent. Whereas the first half of the year saw becoming important demand slump by 20%, investors were flocking to gold as safe haven in the second asset class again half.

Investment demand 2004 - 2007

1000

800

397.5

600 208.1 265 132.6 400 268.7 214.5 256.6 262.7 200 81.4 56.4 26.3 37 114.5 112 129 138.4 0 -56.8 -23.9 -28.3 -33 2004 2005 2006 2007e -200

coin production medals bars other retail investment ETF's Source: www.gold.org, own estimates

The inflows into exchange traded funds (ETFs) in the fourth quarter of 2007 amounted to USD 8bn, i.e. a clear all-time-high since the beginning of the bull market in 2001. Total demand in 2007 was slightly up on 2006 in volume terms, but 15% higher in dollar terms.

ETFs are exchange traded index funds that reflect the gold price 1:1 and that have to physically deposit the gold. Investors like ETFs because of their high degree of transparency and their favourable cost structure.

Numerous new ETFs in The volume of the largest gold ETF, StreetTrack Gold Trust, increased last year to the pipeline 640 tonnes, which meant the fund overtook the Dutch central bank as eight-largest gold owner in the world. At the end of 2007 the Xetra-Gold ETF was floated in Germany. A new ETF is expected for Dubai in 2008 which will be structured in accordance with Sharia law. The State Bank of India plans to issue a gold ETF this

Special Report Gold, June 2008 Page 21 SpecialDemand Report

year as well. In addition, the StreetTRACKS ETF will be listed in Hong Kong by September at the latest. According to the World Gold Council, total demand could rise by almost 30% on the back of ETFs.

The following graph illustrates the volumes of the largest gold ETFs in tonnes:

Source: DB Global Markets Research estimates

Deutsche Bank forecasts The European ETF market is growing rapidly as well. According to a report by a 60% increase in ETF Deutsche Bank, assets invested will reach EUR 150bn in 2010 (volume as per end volumes by 2010 of March 2008: EUR 93bn). The report claims that the volume growth will be mainly due to institutional investors, as especially pension funds will diversify into ETFs.

Demand for investor In addition, mints use gold for their coins, with bullion coins - produced by gold mining coins also on upward nations - representing the most popular end products. Demand has risen sharply over trend the past three years. Holding gold in bullions (i.e. not in coins) is more common in the Middle East and Asia.

In the first quarter of 2008 gold investments in bullions and in coins increased significantly in comparison with the reference period of last year. In Vietnam they increased by 110%, in the USA by 91%, in Germany by 80%, in China by 63%, and in Switzerland by 44%.

Special Report Gold, June 2008 Page 22 DemandSpecial Report

Industrial demand

Industrial demand increased by 2% in 2007 to a total of 465 tonnes. Demand from the industrial sector accounts for slightly more than 10% of total demand. Consumption in this segment will probably continue to grow by 5 to 10%. Only a severe global recession could cause demand to shrink temporarily.

Gold is easy to process and has outstanding conductivity for electricity and heat. These characteristics make the yellow precious metal an important commodity for industrial use. The most important field of application is the electrical industry where gold is used for circuits, die bonds, relays, connectors, and printed circuit boards among other things. Another important area is dentistry.

Industrial demand 2004 - 2007 in tons

100% 62.4 59.8 57.7 90% 67.6

80% 86.2 93.2 83.1 85.6 70% 60% 50% 40% 281.4 312.2 314.6 30% 260.4 20% 10% 0% 2004 2005 2006 2007

electronics industry other industrial use dentistry Sources: own research, Bloomberg

Conclusion demand:

All three components of demand (jewellery, industry, investment) have embarked on long-term upward trends that are still intact. Driven by the rapid development of the emerging countries (especially China), jewellery demand should display stable growth rates over the coming years. With regard to hedging, we expect lower demand due to the fact that most contracts have been terminated already. Investment demand seems to remain very robust given the increasing importance of commodities as asset class. This area is where we envisage the largest growth rates. Industrial demand should continue to grow as well; this component, however, is of subordinate significance.

Special Report Gold, June 2008 Page 23 GoldSpecial and Report its specific characteristics

1. Gold is both monetary asset and commodity

The first gold coin dates The gold market differs from other commodity markets in that a substantial part of back to 500 B.C. it is bought for investment reasons (e.g. as protection against inflation). On top of that, the monetary aspect is often forgotten due to 20 years of bear market, the massive central bank sales over the past few years, and the end of the Bretton Woods Agreement. Currencies always used to be simple gold derivatives. The entire money creation by the central banks was covered by physical gold reserves. Therefore gold is both commodity and monetary asset. Historically speaking, the yellow precious metal has always been used to cover the currency. Even 5,000 B.C. the value of goods was assessed in gold units, and about 500 B.C. the first pure gold coin was minted.

"The USA should hold on to its gold reserves. (…) Gold still represents the highest form of payment in the world. During the war in 1944, Germany could only buy materials with gold. Paper money, in extremis, will not be accepted by anyone - gold on the other hand will always be accepted."

Alan Greenspan, "Gold and Economic Freedom"1

Numerous fields of Gold comes with a multitude of characteristics that make it an ideal means of application for gold payment and of value conservation. It is durable, easily recognisable, suitable for storage, and above all, divisible. On top of that, it is almost impossible to boost the gold reserves in a sustainable way without a certain (considerable) lead time. Due to its melting point of 1,063 degrees centigrade and its high chemical stability it is almost indestructible, which means that all gold that has ever been mined is still around. It is also the most dilatable of all metals and can be pressed to a sheet of one ten thousandth millimetre or dilated to a thread of 105 kilometres (per ounce). Gold has a very high electrical conductivity and is therefore widely used in electrical appliances of all sorts.

2. Gold as protection against inflation

Gold in the sixth Gold and the development of inflation have a highly positive correlation. Therefore the century B.C. and during investment in gold represents an excellent way of protecting one's purchase power. the Weimar Republic The dollar has lost 95% of its value since the establishment of the Federal Reserve in 1913 (source: Fed inflation calculator), whereas gold has increased from USD 20.67 to above 1,000 by a factor of 50.

Gold has been known to constitute a good hedge against inflation at least since the 1970s. But even much longer time series confirm the stable purchase power of the yellow precious metal. According to a passage in the Old Testament, one ounce of gold would buy you 350 loafs of bread at the time of Nebuchadnezzar, the ruler of Babylon in the sixth century B.C. And today one ounce still buys you almost the same basket of goods. And according to a favourite saying one ounce of gold has always bought you a good suit - in the 18th century, in 1930, and today.

The German hyperinflation of 1923 was probably the most extreme example in the last century. In 1871 the German Empire declared the gold mark official legal tender. The system proved successful until 1918, when Germany could no longer come up with sufficient volumes of gold marks to honour its high reparations in the aftermath of WWI. Fiat money not covered by gold was introduced, resulting in hyperinflation in the 1920s. Said hyperinflation made it possible to snap up whole blocks of houses for 500 grams of gold during the Weimar Republic. Although the ghost of hyperinflation

1Alan Greenspan, US House Banking Commitee on 24th of July 1998, German translation by Ferdinand Lips

Special Report Gold, June 2008 Page 24 GoldSpecial and Report its specific characteristics

should not re-appear in Europe in the foreseeable future, the example goes to show how well suited gold is as means of value conservation and how important it is as crisis-proof pillar in a diversified investment strategy.

Inflation-adjusted gold The latest price increases and the passing of the (psychologically important) price still historically threshold of USD 1,000 per ounce can be put into perspective by looking at the low inflation-adjusted gold price chart. At the end of the 1970s/beginning of the 1980, gold was worth up to USD 850 per ounce, while the average household income in America was about USD 17,000 annually. Today a family of four with an annual income of USD 17,000 would be living below the poverty line. The debt level of the American households has risen dramatically over the past decades. Whereas private households had total debts of USD 10 trillion in 1987, they have amassed USD 28 trillion in the meantime (or almost 3.5 times GDP). This means that a nominal comparison of the gold price over past decades makes only limited sense. Therefore you find an inflation-adjusted time series of the gold price in the following:

Inflation adjusted price of gold

950 850 750 650 550 distance from alltime-high ~ 260 % 450 USD/Unze 350 250 150 50 Sep-70 Sep-72 Sep-74 Sep-76 Sep-78 Sep-80 Sep-82 Sep-84 Sep-86 Sep-88 Sep-90 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06

inflation adjusted price of gold Source: Bloomberg, own calculations

Put into a long-term perspective the development of the gold price does therefore not appear overheated. All that has happened is the reversal of the downward trend. The chart above illustrates that on an inflation-adjusted basis the gold price is still almost 260% below its 1980s highs. In order to reach its all-time-high in real terms the yellow metal would have to rise to USD 2,300.

First real-term all-time- In 1980 the American currency had a much larger purchase power than today. Based high of oil price on the official inflation calculator of the Federal Reserve the inflation-adjusted all- recently - when is gold time-high is USD 2,300. In other words, gold would have to cost more than USD 2,300 to follow? in order to reflect the real value of 1980. Oil, the black gold, has recently passed its real highs of the 1980s for the first time. We expect the same for gold sooner or later.

2fiat money: money decreed by government: paper money that a government declares to be legal tender although it is not based on or convertible into coins and therefore depends on government decree to determine its value

Special Report Gold, June 2008 Page 25 GoldSpecial and Report its specific characteristics

Gold and Crude Oil inflation adjusted

900 53 49 real oilprice exceeds alltime- 800 45 high for the first time 700 41 37 600 33 500 29 Oil

25 real price of gold 400 Gold 21 far below alltime-high 300 17 13 200 9 100 5 1 0

1970 1972 1975 1977 1980 1982 1985 1987 1990 1992 1995 1997 2000 2002 2005 2007 Crude Oil inflation adjusted Gold inflation adjusted

Source: Bloomberg, Datastream

Money with zero Money supply was also significantly expanded because of the massive liquidity maturity (MZM) supply injections by the US Fed. The following chart shows the annualised change in MZM growth highlights (money with zero maturity) which contains daily callable money. MZM has been expansive monetary published by the Federal Reserve St. Louis since 1991 and includes M2 minus small policy by the US central time deposits and institutional money market funds. Since the publication of M3 was bank discontinued in 2006, MZM has probably best reflected the increasingly expansive monetary policy of the Fed. Whereas MZM increased by 9.2% in the whole of 2007, it had soared by 30% until April 2008 before coming down a bit more recently.

% change in MZM since 1991

Recession

?

Source: Federal Reserve Bank St. Louis

Special Report Gold, June 2008 Page 26 GoldSpecial and Report its specific characteristics

Further down you see the money supply in billions of US dollar, with the grey areas indicating recessions. During and immediately after such periods the expansion of money supply would be particularly pronounced.

Absolute MZM

Source: Federal Reserve Bank St. Louis

Misery Index as reliable The Misery Index is the sum of inflation and unemployment rate. Due to the leading indicator sensitivity of the gold price to the rate of inflation and general economic decline there is a strong correlation between the gold price and the Misery Index. The following chart shows that the Misery Index tends to break away before the gold price does, which would confirm the bullish scenario for the gold price.

Gold vs. Misery-Index

1100 21 1000 900 19

800 17 700 sustainable outbreak ? 15 600

Gold 500 13

400 11 Misery Index 300 9 200 100 7 0 5 1960 1962 1965 1967 1970 1973 1975 1978 1980 1983 1985 1988 1991 1993 1996 1998 2001 2004 2006 Gold Misery Index

Source: Bloomberg, own calculations

Special Report Gold, June 2008 Page 27 GoldSpecial and Report its specific characteristics

In the past, rising inflation has therefore not usually preceded a worsening commodity performance. By and large commodity performance would point the same direction as the change of inflation rate. Thus, commodity investments have offered better protection against rising inflation than traditional asset classes. This result does not really come as a surprise, seeing that certain commodity prices are taken into consideration when calculating consumer prices, and help achieve a kind of natural synchronicity.

Gold as dollar hedge

Oil-producing and An ever larger number of countries have been criticising the hegemony of the US Islamic countries dollar and the economic privileges it entails. Oil-producing countries such as Russia, criticise the US dollar Venezuela, Kuwait, Iran, the United Arabic Emirates, and Saudi Arabia have as world currency repeatedly uttered their dissatisfaction with dollar-based invoicing. Should they eventually prevail, this shift would certainly weigh on the US dollar (and support the gold price). On top of that, Islamic countries have looked into the creation of a gold- covered single currency (the gold dinar). Malaysia for example has been working on a plan to introduce the gold dinar for bilateral and multilateral transactions with Islamic countries since 2004. And in Russia there are those who demand that the rouble be covered by gold.

19 countries hold The following chart illustrates the huge demand for dollar diversification and hedging reserves of more than of dollar exposure: USD 5.2 trillion

Reserves in Billion US-Dollars

China 1,528.00 Algeria 107.03 Japan 979.00 Malaysia 98.83 Russia 451.79 Mexico 84.65 OPEC 430.88 Thailand 82.39 Taiwan 277.09 Libya 74.42 India 264.73 Poland 65.33 Korea 259.69 Norway 60.34 Hong Kong 159.90

Total 5492.03

Source: IMF December 2007; Dr. Martin Murenbeeld, Dundee Wealth Economics

Special Report Gold, June 2008 Page 28 GoldSpecial and Report its specific characteristics

The Asian central banks' share of gold in terms of total reserves is substantially below that of their European counterparts, as highlighted in the following table:

SE Asia has over $ 3 Trillion reserves Gold Reserves Exchange Gold as a percentage last Date Reported in Tonnes Reserves (bn USD) of Total Reserves

China Dec. 07 600 1,528.00 1.06% Japan Feb-08 765 979.60 2.09% Hong Kong Jan. 08 2 159.90 0.04% Korea Jan. 08 14 261.40 0.15% Singapore Jan. 08 127 266.70 1.29% Taiwan Feb-08 423 277.80 4.00% Total 1931 3,473.40

Source: IMF April 08, Dr. Martin Murenbeeld, Dundee Wealth Economics

*Gold valued at USD 850 In order to hold 15% of total reserves in gold, China would theoretically have to buy 7,200 tonnes, Japan 6,850 tonnes, and the remaining Asian central banks would have to buy 6,000 tonnes of gold (at an average price of USD 600). The oil-producing OPEC countries would have to buy a total of 1,500 tonnes (i.e. some 50 million ounces) of gold if they wanted to achieve a level of 15% of gold coverage in their reserves.

Asian nations are The intensifying efforts for autonomy among the Asian countries have been setting up own underlined by the recent establishment of an Asian Monetary Fund. During a meeting Monetary Fund in Madrid at the beginning of May, 13 Asian countries agreed to set up a currency pool of USD 80bn. 80% of this sum will be provided by China, Japan, and South Korea, the rest will come from the other ASEAN member states. Almost ten years after the Asian currency crisis the goal is to lower the degree of dependence on the IMF.

Dollar index breaks The dollar index is a basket of currencies consisting of the euro (57.6%), the massive support Japanese yen (13.6%), the British pound (11.9%), the Canadian dollar (9.1%), the Swedish crown (4.2%), and the Swiss franc (3.6%). Recently the index has for the first time broken through the support at 80 and is currently heading towards 70. Since July 2001 the dollar index has been in a secular bear market and has lost almost 40% of its value, and the end of the downward trend is still not in sight. This is why the dollar creditors' eagerness to diversify does not come as a surprise.

Special Report Gold, June 2008 Page 29 GoldSpecial and Report its specific characteristics

Dollar Index vs. Goldprice

170 1100 160 1000 150 900 140 800 130 700 120 600 110 500 100 90 400 80 300 70 200 60 massive support breaks 100 50 0

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1993 1995 1997 1999 2001 2003 2005 2007 Dollarindex Gold/Unze Source: Bloomberg, own calculations 4. Commodity investments and their golden future

State funds as buyers? Commodities remain strongly underweighted in the portfolios of institutional and retail investors. The increasingly active Sovereign Wealth Funds of Dubai and Singapore recently announced they would invest parts of their assets in gold. The state fund currently has assets under management of USD 3 trillion. According to a study by Morgan Stanley those assets might quadruple to up to USD 12 trillion by 2015. But it is not only Asian funds that have discovered the attractiveness of the yellow precious metal. The pension fund of the Californian civil servants, Calpers, recently said it would increase investments in raw materials and gold by a factor of 16.

Commodity investments The following chart illustrates the low prevalence of commodity investments in still underweighted in institutional portfolios. Institutions currently manage USD 55 trillion in assets, but institutional portfolios only USD 225bn are invested in commodities. This means that soft assets exceed hard assets by a factor of 275. Total paper assets (USD 123 trillion) exceed commodity investments even by a factor of 615.

Dollar Index vs. price of gold

60 Global financial institutionally 56 assets: managed assets: 52 USD 123 USD 55 trillions 48 44 trillions 40 36 32 28 Trillions 24 20 USD 225 billions 16 12 8 4 0 Equities Private Debt Government Managed Managed Debt Assets Commodities

Source: Dr. Martin Murenbeeld, DundeeWealth Economics

Special Report Gold, June 2008 Page 30 GoldSpecial and Report its specific characteristics

Commodities: Alternati- Since equities and bonds were delivering extraordinarily positive performances in ve investments or historic comparison from 1980 to 2000, commodities were completely disregarded traditional investment during that period. Although commodities are basically a traditional investment class? class, they have ended up among alternative investments just like hedge funds or private equity for example due to 20 years of underperformance. But the price hike since 2001 has strongly revived the interest among global investors.

Nevertheless, commodities are strongly underrepresented on a global scale. According to a media survey among institutional investors in the USA, close to 60% of the participants are not invested in this area, but two thirds thereof are going to invest at least 5% of their assets under management or more. This is why we believe that the asset class of commodities, and primarily gold, will gradually gain significance in the strategic asset allocation of institutional investors.

5. Gold is a scarce and limited resource - example: Pareto distribution

The Pareto distribution Gold is a very scarce resource; the total amount of the gold mined so far is only outlines the low volume 159,000 tonnes. To illustrate it, this is equal to a cube with an edge length of not even of gold per capita 19 metres.

The Pareto distribution (80/20 distribution) describes the statistical phenomenon of unequal distribution which comes up in many different areas. In other words, the majority of global activities in various areas are handled by only a fraction of the participants. Pareto himself was mainly interested in applying his principle to the wealth of nations which was then (as today) held by a small minority of the population. He found out that the distribution of income was remarkably similar across the different countries; for example, the 20 richest percent of the population would typically own 80% of total wealth.

If applied to the gold sector, the Pareto principle would therefore by virtue of analogy contend that 20% of the population own 80% of the global gold reserves, and 80% of the population own 20% of the reserves.

Taking into account a total global amount of gold of 159,000 tonnes and 6.3bn people, the following allocation results:

z 20 % of the world population - 80 % of the gold reserves: 3.245 ounces per capita z 80 % of the world population - 20 % of the gold reserves: 0.2028 ounces per capita

Under the premise that 50% of the gold have fixed owners (central banks, institutional investors, industrial use), the model yields the following results:

z 20 % of the world population - 80 % of the gold reserves: 1.64 ounces per capita z 80 % of the world population - 20 % of the gold reserves: 0.1014 ounces per capita

Conservative estimates put the world population in 2050 at 9.5bn. Based on the assumption that India, the world's largest gold consumer, will grow above average, we arrive at a highly positive scenario as far as long-term demand is concerned. The threat of gold shortages could therefore be part of a rather realistic setting.

Special Report Gold, June 2008 Page 31 GoldSpecial and Report its specific characteristics

6) Gold as diversification - low correlation to other asset classes

No significant Portfolio diversification is one of the pillars of a balanced long-term investment correlation with equities strategy. Gold has the extremely positive feature of low correlation with most other or bonds asset classes. Statistically there has been no significant correlation with domestic or foreign equities. Nor do US government bonds, treasury bills, or REITs show any significant degree of correlation. On top of that, in periods of crises there is an inverse relationship with equity investments, i.e. when shares plunge, gold rises. The ten- year correlation coefficient of gold mining shares and the MSCI World Index is only 0.11, and the coefficient of gold bullions and the index is even lower at 0.022. Many a time the correlation with the euro/dollar exchange rate has been overrated; in 2007 average correlation was at 0.48, which means it had come down substantially from the levels of previous years.

The following graph shows the average three-year correlation coefficient of weekly performances with other commodities as well as equity and commodity indices:

Correlation Gold vs. other asset classes

Gold Silver DJ AIG Commodity Index Palladium Platinum Aluminium Copper Oil (Brent) Nickel Goldman Sachs: Agricultural TR MSCI World ex Japan MSCI World ex US CRB Index LEHMAN BROS. GLOBAL EM BOND SERIES MSCI World ex Europa DAX 30 Index MSCI World excl. Europe 3-Month T- Bill Yields S&P 500 EURIBOR 3-Month DJ Industrial Average 0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000 0.7000 0.8000 0.9000 1.0000 -0.6000 -0.5000 -0.4000 -0.3000 -0.2000 -0.1000

Source: JCF, Datastream, own calculations

Special Report Gold, June 2008 Page 32 GoldSpecial and Report its specific characteristics

The chart underneath illustrates the annual performance of gold in comparison with S&P 500 since 1970:

Annual % changes of gold and S&P 500

120% 110% S&P: ø 8.4 % 100% Gold: ø 11.3 % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Gold Bullion LBM U$/Troy Ounce S&P 500 (US) Sources: JCF, Datastream, own calculations

Special Report Gold, June 2008 Page 33 RatioSpecial analysis Report

By analysing the long-term relationships of gold with other assets we wish to provide the reader with the basis for a different, long-term perspective of the market. Calculations are based on simple divisions.

In the following, we will analyse these ratios:

z Dow / gold z Gold / oil z Gold / silver z Gold / HUI index

Dow Jones / gold

Dow/gold ratio indicates The long-term comparison of the two asset classes, equities and gold, indicates the that gold remains current attractiveness of the gold price. The ratio expresses how many ounces of gold undervalued against would be required to buy the entire Dow Jones Industrial index. A Dow Jones price equities of 12,700 and a gold price of USD 880 per ounce yield a ratio of 14.4. This means that 14.4 ounces of gold are necessary to buy the Dow Jones or one share of each of the 30 companies represented in the index. Historically speaking, the Dow Jones has been undervalued when the ratio fell below 5, which was the case after the crash in October 1987 for the last time so far (the ratio dipped to 3.5). After that the Dow Jones index and the gold price were developing in diametrically opposed directions. Whereas gold re-embarked on its long-term bear market in the following years, the Dow Jones index skyrocketed. The ratio posted its all-time-high at above 40 in August 1999. After the first sharp correction the subsequent rally failed to climb to previous heights. From that moment on the ratio would only reach lower local highs, with each one usually lower than the previous one, thus establishing a downward trend which is still intact. At currently 14.4 and in comparison with gold the US equity market is still clearly overvalued and gold is clearly undervalued, respectively. In order for the ratio to generate a buying signal for equities, it would have to fall to a bandwidth of 5 to 2. Even a ratio of 1 would not be historically unusual: prior to the bull market on the stock exchange in 1980, the Dow Jones index was hovering around 900 points, and gold was at USD 850 per ounce. 1930 saw a similar scenario. The ratio of Dow Jones index and gold price hit its lows always in a band between 1 and 2. That was the signal to switch from gold to equities. The latest cycle started in 1999 at values of above 40. Shortly before the crash in 2000 the ratio had been at 43.7. The cycles posted their historic lows in 1933 and 1980, respectively. Since the collapse of the Bretton Woods Agreement in 1971 the average of the ratio has been 13.2, i.e. about the current level. From 1900 to 2007 the average was 5.5. This leaves room for a possible scenario where the Dow Jones index and the gold price develop diametrically again - only this time the Dow Jones would fall to 10,000 and the gold price would rise to USD 2,000.

Special Report Gold, June 2008 Page 34 RatioSpecial analysis Report

The Dow/gold ratio therefore pinpoints that cyclical long-term lows on the gold market go hand in hand with long-term highs on the equity market, and vice versa.

Dow/Gold Ratio

45

40

35 30

25

Ratio 20

15 10

5

0 Date 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Dow/Gold Ratio Source: Bloomberg, own calculations Gold / Oil

Oil and gold have a highly positive correlation. Both commodities are traded in US dollars and tend to rise when the dollar weakens against the most important currencies. In addition, oil is one of the most important indicators of inflation and thus also for the gold market. And the argument according to which we have reached or are about to reach peak oil, i.e. the peak of oil production, can also be applied to gold by ways of analogy.

In relation to oil, gold is currently close to its all-time-low, i.e. very cheap by historic standards. The current gold/oil ratio, i.e. the ratio of one ounce of gold to one barrel of crude oil, is close to 7, whereas the long-term average is 17.6 and the median is 16.1. This means that at ratio highs of more than 40 like in 1973 or 1986, the gold price would have to rise to almost USD 4,000 per ounce (at constant oil prices of USD 100/barrel). We therefore expect either gold to increase sharply or oil to fall significantly in the foreseeable future. Alternatively, the long-term increase of both is also possible, with gold outperforming oil. Even if the ratios do not seem compelling at first glance, they do contain information as to the future potential based on the historic context.

The stable purchase power of gold is also reflected by this ratio: Currently one ounce of gold buys you the same amount of oil as it did in 1945, 1982, and 2000.

Special Report Gold, June 2008 Page 35 RatioSpecial analysis Report

Gold/Oil Ratio

45

40

35

30

25

20

15

10

5

0

1970 1972 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1996 1998 2000 2002 2004 2006

Source: Bloomberg, own calculations

Gold / silver ratio

This ratio shows how many ounces of silver can be bought for one ounce of gold. It is considered a reliable indicator for the over- or undervaluation of both precious metals in dollar terms. The current ratio is 53. Whereas before 1990 the average ratio had been 45, since 1990 it has risen to 67. In 2007 the average was 51. At the peak of the latest gold/silver boom in 1980 the ratio was 17. In the periods of 1970 to 1991 and 1993 to 2003 this ratio was also an excellent indicator for the equity market. Anything above 58 is considered a leading indicator of weak equity markets and of a pronounced relative strength of precious metals.

Gold/Silver - Ratio

100

90

80 70

60

Ratio 50

40 30

20

10 1970 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Gold/Silver - Ratio Source: Bloomberg, Datastream, own calculations

Special Report Gold, June 2008 Page 36 SpecialRatio analysis Report

Gold / HUI (Amex Gold Bugs index) ratio

The relationship of gold price and Amex Gold Bugs index (HUI) is currently 2.1. It expresses the relative performance of gold vis-à-vis the unhedged shares of the Amex Gold Bugs index. Although the index temporarily broke out of a long and gruelling sideways channel in 2005, it failed to build sustainable strength against the gold price. Thus the sideways trend indicates that gold mining shares basically do not outperform gold. In fact, both have been developing more or less hand in hand since 2003. The average of the ratio is 2.94, and the median is 2.4.

Gold HUI Ratio

7,5 7 6,5 6 5,5 5 4,5 4 3,5 3 2,5 2 1,5 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Bloomberg, Datastream, own calculations Conclusion ratios:

The long-term comparison of gold and other investments supports our positive scenario; especially the comparisons with the Dow Jones index and with oil show that the yellow precious metal is still attractively valued in a historical context.

Special Report Gold, June 2008 Page 37 GoldSpecial mining Report shares

Benchmark indices The Philadelphia Gold & Silver index (XAU), the Amex Gold Miners and the Amex Amex Gold Bugs, Gold Bugs index are the benchmarks in the gold mining sector. In the following you Philadelphia Gold & find an overview of the performance of the different indices since the beginning of the Silver, and Amex Gold bull market: Miners Performance gold indices

700 600 500 400 300 200 100 0 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Amex Gold Bugs Index Philadelphia Gold & Silver Amex Gold Miners Index Gold/Unze Spot CRM Index Source: Datastream Amex Gold Bugs index

An investment in the Amex Gold Bugs index (which is an acronym for Basket of Unhedged Gold Stocks; although the most outspoken and, one might almost say, obsessed supporters of the gold standard are also called "gold bugs") is particularly interesting from a diversification point of view. This index contains the most important unhedged gold and silver mining companies. This means that the companies have sold their future gold production forward by a maximum of 1.5 years and will thus participate above average in the increase (and the fall) of gold prices. The companies listed in the index account for about 25% of the worldwide gold production. Shares of gold miners participate at disproportionately high rates in the development of the gold price. This can be put down to the inventories which are exposed to appreciation and depreciation, respectively. The larger the share of forward sold production, the smaller the leverage. The heavyweights of the index, which contains 15 companies, are Goldcorp, Barrick, and Newmont Mining.

Composition of Amex Gold Bugs Index M.Cap. Weighting Amex Gold Bugs Index (HUI) Subsector Country in USD mn Index % CA3809564097 Goldcorp Inc Gold Mining CANADA 28.850 15,83 CA0679011084 Barrick Gold Corp Gold Mining CANADA 38.392 15,29 US6516391066 Newmont Mining Corp Gold Mining UNITED STATES 21.096 9,84 GB00B01C3S32 Randgold Resources Ltd Gold Mining JERSEY 4.046 5,84 CA2849021035 Eldorado Gold Corp Gold Mining CANADA 2.522 5,46 US4227041062 Hecla Mining Co Platinum & Precious Metals UNITED STATES 1.444 5,35 CA4969024047 Kinross Gold Corp Gold Mining CANADA 14.381 5,26 CA0084741085 Agnico-Eagle Mines Ltd Gold Mining CANADA 9.895 4,99 CA4509131088 Iamgold Corp Gold Mining CANADA 2.216 4,99 CA6664161024 Northgate Minerals Corp Gold Mining CANADA 839 4,86 US1921081089 Coeur d'Alene Mines Corp Precious Metals & Minerals UNITED STATES 2.165 4,72 ZAE000015228 Harmony Gold Mining Co Ltd Gold Mining SOUTH AFRICA 4.633 4,70 ZAE000018123 Gold Fields Ltd Gold Mining SOUTH AFRICA 9.044 4,53 CA98462Y1007 Yamana Gold Inc Gold Mining CANADA 9.739 4,45 CA38119T1049 Golden Star Resources Ltd Gold Mining UNITED STATES 815 3,901 150.076 100,00 Sources: JCF, own research

Special Report Gold, June 2008 Page 38 SpecialGold mining Report shares

Strongly positive In the past three months we have noticed yet another positive overhang of earnings revision ratio recently: revisions. This means that more analysts have revised their earnings forecasts upward then downward, which has been a recurrent seasonality in recent years. The sales as well as the margin revisions have also exhibited a positive momentum.

Revision Ratio HUI

700 60

600 40

500 20

400 0

300 -20

200 -40

100 -60

0 -80 12/99 06/00 12/00 06/01 12/01 06/02 12/02 06/03 12/03 06/04 12/04 06/05 12/05 06/06 12/06 06/07 12/07

Rev. Ratio FY1 AMEX Gold Bugs Index Sources: JCF, own research

Philadelphia Gold & Silver index

The oldest and probably best known North American mining index is the Philadelphia Gold & Silver index, also known under its code "XAU index". It contains the 16 most important hedged and unhedged gold and silver companies and was introduced in 1979 at an opening price of 100 points.

Due to the de-hedging programmes of recent years the composition of the index has changed. Barrick Gold for example was not represented in the Amex Gold Bugs index for quite some time, and now after clearing out its hedge book it commands a weight of 16.7% in HUI and of 21% in XAU. 53% of the companies in HUI, XAU, and the FTSE Gold Mines index are currently identical.

Composition of Philadelphia Gold & Silver

Philadelphia Stock Exchange M.Cap. Weighting Gold & Silver (XAU) Subsector Country in USD mn Index % US35671D5014 Freeport-McMoRan Copper & Gold Inc Diversified Metals & Mining UNITED STATES 40,964 20.28 CA0679011084 Barrick Gold Corp Gold CANADA 38,392 18.99 CA3809564097 Goldcorp Inc Gold CANADA 28,880 14.22 US6516391066 Newmont Mining Corp Gold UNITED STATES 21,096 10.45 CA4969024047 Kinross Gold Corp Gold CANADA 14,381 7.11 ZAE000043485 AngloGold Ashanti Ltd Gold SOUTH AFRICA 10,007 4.95 CA0084741085 Agnico-Eagle Mines Ltd Gold CANADA 9,895 4.89 CA98462Y1007 Yamana Gold Inc Gold CANADA 9,739 4.52 ZAE000018123 Gold Fields Ltd Gold SOUTH AFRICA 9,044 4.48 ZAE000015228 Harmony Gold Mining Co Ltd Gold SOUTH AFRICA 4,633 2.29 GB00B01C3S32 Randgold Resources Ltd Gold JERSEY 4,046 2.00 CA8283361076 Silver Wheaton Corp Precious Metals & Minerals CANADA 3,676 1.82 CA6979001089 PAN American Silver Corp Precious Metals & Minerals CANADA 3,173 1.50 US1921081089 Coeur d'Alene Mines Corp Precious Metals & Minerals UNITED STATES 2,165 1.07 CA82823L1067 Silver Standard Resources Inc Precious Metals & Minerals CANADA 1,958 0.97 US7802871084 Royal Gold Inc Gold UNITED STATES 942 0.47 202,989 100.00 Sources: JCF, own research

Special Report Gold, June 2008 Page 39 GoldSpecial mining Report shares

Many companies report rising reserves, but this is very often due to the decrease in production volume. Barrick Gold for example recorded a fall in production from 2001 to 2004 of 19%, and the confirmed reserves increased by 8%. This means that the life of the reserves increased from 13.4 to 18 years within three years.

EPS Growth Majors vs. Mid-Tier

250%

200%

150%

100%

50%

0% 2004 2005 2006 2007 2008e 2009e 2010e -50%

-100% Majors Mid-Tier Producer

Sources: JCF, own research

Comparison Mid Tier Producers vs. Majors vs. Gold since 2002

780 730 680 630 580 530 480 430 380 330 280 230 180 130 80 H2 2001 H1 2002 H2 2002 H1 2003 H2 2003 H1 2004 H2 2004 H1 2005 H2 2005 H1 2006 H2 2006 H1 2007 H2 2007 H1 2008

Gold Mid-Tier Gold Majors Gold New-York $/Oz

Source: Datastream, JCF

Special Report Gold, June 2008 Page 40 SpecialGold mining Report shares

Amex Gold Miners Index

The index contains 34 international gold and silver producers with a market capitalisation of at least USD 100mn each. Barrick (9.19 %), Goldcorp (8.77 %), Anglogold Ashanti (6.66 %) und Newmont Mining (6.63 %) command the heaviest weightings. In contrast to Amex Gold Bugs and Philadelphia Gold & Silver, the Amex Gold Miners index does contain a number of mid-tier producers.

Please find various key ratios of the index in the following:

PE and Price/Cashflow 2005-2010

90 80

70 60

50 x 40

30 20

10 0 2005 2006 2007 2008e 2009e 2010e PE-Ratio Price/Cashflow Ratio Source: JCF, own calculations

EPS & Sales growth Amex Gold Miners Index

180%

160%

140%

120% 100%

80%

60%

40% 20%

0%

-20% 2005 2006 2007 2008e 2009e 2010e EPS Growth Sales Growth Source: JCF, Datastream

Special Report Gold, June 2008 Page 41 GoldSpecial mining Report shares

Return on equity Amex Gold Miners Index

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00% RoE 05 RoE 06 RoE 07 RoE 08 RoE 09 RoE 10 Source: JCF, Datastream

Selection criteria of gold shares

The essential factors and selection criteria of gold shares are:

z Reserve growth z Cash costs / ounce z Production growth z Cash flow z Management z Infrastructure z Political risk z Gold price

The reported reserves and resources are the focus of the valuation of gold shares. Basically these are quantifications of ore deposits in the ground. It is crucial to differentiate between the two terms, because a successful exploration does not necessarily result in actual production.

Resource:

z The actual deposit and its purity and quality z Resources are geologically confirmed, but the economic feasibility of the mining is not

Resources are broken down into:

a) Inferred resources:

z Rough estimate on the basis of samples and measuring data of experts in geophysics or geochemistry z Inferred resources may not be used for the feasibility studies

b) Indicated resources:

z The status after additional drillings have been carried out

Special Report Gold, June 2008 Page 42 GoldSpecial mining Report shares

c) Measured:

z The most advanced state of exploration

Transformation of a resource into a reserve is from the "indicated" or "measured" stage only. After a thorough examination (specific mining methods, metallurgical processes, environmental compatibility, safety measures etc) and the confirmation of the economic feasibility (temporary feasibility study) it is possible to judge whether the deposit can be profitably mined. If that is the case, the deposit is called a reserve.

Reserve:

The portion of the resource that can be profitably mined under the given circumstances. The reference work of the respective mining association explains in detail how the feasibility study has to be performed and what deposits can be mined profitably. Reserves are a subset of resources.

Reserves are broken down into:

a)Proven reserves:

z Deposits that are very likely to be minable in the current price setting and with the given technical standards z According to a rule of thumb there should be enough data available for the margin of error not to exceed 10% and for the confidence level to reach 80%. z The fewer data there are available, the higher the margin of error and the lower the confidence level.

b)Probable reserves:

z Deposits that are 50% probable to be minable in the current setting. z The knowledge about the resource is fragmentary, but there is a link to a certain resource.

c)Possible reserves:

z Deposits that are only 10% likely to be minable.

d)Undiscovered reserves:

z The existence of minerals can be concluded from comparisons with geologically similar deposits.

It is important to draw a clear distinction because reserves can be substantially smaller than resources. The comparability of these key figures is guaranteed by well- defined national standards (e.g. JORC Code in Australia, SAMREC Code in South Africa).

Cash costs per ounce represent another important key ratio. This indicator includes all mining costs (including transport and administrative, excluding mining interest, severance taxes, depreciation, recultivation, administrative group overhead, capital costs and exploration expenditures) per ounce of gold mined. Total production costs include severance taxes, amortisation, and recultivation.

Please find an overview of the 15 largest gold producers and their valuations underneath.

Special Report Gold, June 2008 Page 43 GoldSpecial mining Report shares

Selected large Cap gold stocks

Proven + Market Cash Probable EPS % EPS % Capitalization Costs/Unze P/E 08 P/E 09 Reserve (Mio. Change 08 Change 09 in Mio. USD 2008e ounces) Barrick Gold 36,918 129.20 415 17.4 x 15.9 x 22.6% 9.0% Goldcorp 30,574 43.38 250 42.0 x 34.8 x 93.9% 20.8% Newmont Mining Corp. 23,974 86.50 450 20.8 x 16.6 x 86.2% 25.2% Kinross Gold 13,151 46.60 395 32.6 x 18.6 x 77.2% 75.4% Anglogold Ashanti Ltd. 11,066 73.10 460 90.3 x 21.3 x -51.9% 324.0% Agnico Eagle Mines Ltd. 10,505 16.70 50 74.6 x 46.3 x -5.8% 61.2% Gold Fields 9,154 89.80 507 11.9 x 12.3 x 93.4% -3.0% Yamana Gold Inc 9,996 17.90 290 18.7 x 16.5 x 53.6% 13.1% Compania De Minas Buenav 9,087 13.29 306 15.3 x 12.9 x 44.4% 18.4% Lihir Gold Ltd 6,054 23.60 350 26.0 x 18.2 x 80.0% 42.7% Harmony Gold Mining 5,099 53.60 609 15.2 x 10.4 x 508.7% 46.4% Randgold Resources Ltd. 3,571 8.53 440 41.6 x 37.5 x 87.6% 11.1% Centerra Gold Inc 2,218 7.00 400 10.8 x 8.3 x 427.5% 30.2% Eldorado Gold Corp. 2,722 7.65 246 26.3 x 18.4 x 200.0% 43.3% IAMGOLD Corp. 1,930 2.58 470 13.9 x 13.6 x 135.0% 2.1% MEDIAN 7,571 17.30 398 22.4 x 17.4 x 83.8% 36.5%

Source: JCF, Firmendaten, Bloomberg, http://www.caseyresearch.com/?ppref=CSR000EM0508A Further tendencies of consolidation in the gold mining sector

Sector consolidation will continue due to numerous factors

Due to structural problems in the commodity industry, the tendencies of consolidation are set to continue, and mainly exploration companies and mid-tier producers will benefit. But similar to the base metal sector (Rio Tinto/BHP Billiton) the gold sector might see the merger of two majors as well.

The following factors support our argument of a sustained wave of take-overs:

z After buying back their hedge positions, the large miners now have enough financial space, but are faced with the problem of lower replenishment of resources. z A limited number of qualified staff. z Ambitions to diversify regionally. z Economies of scale are supposed to dampen the sharp increase in exploration costs. z The quest for size is no end in itself: In 1998 the price tag on the construction of an underground mine was about USD 100. Now it is up to USD 1bn. z While the top ten producers had accounted for 25% of global production in 1996, their share had increased to 44% in 2006. The top five of the sector made up 33% of total production.

According to a report by PricewaterhouseCoopers the number of take-overs in the mining industry increased by 69% in 2007. Total transaction volume was USD 158bn, i.e. 189% up on the previous year. In North America the number of transactions more than doubled from 310 to 695, especially the area of junior and near term producers saw a number of take-overs and mergers. The deal volume also increased in Asia (+72%), Africa (+81%), and South America (51%). 32% of the targets were from China, followed by 22% from Australia.

Special Report Gold, June 2008 Page 44 SpecialGold mining Report shares

In the following you find an overview of the largest transactions last year:

Target Name Acquirer Name Seller Name Announced Total Value (mil.) MERIDIAN GOLD INC YAMANA GOLD INC 3427.01 CORTEZ JOINT VENTURE BARRICK GOLD CORP RIO TINTO PLC 1695.00 ROYALTY & NON-CORE ASSETS FRANCO-NEVADA CORP NEWMONT MINING CORP 1300.00 MIRAMAR MINING CORP NEWMONT MINING CORP 1269.93 WESTERN AREAS LTD GOLD FIELDS LTD 1221.50 ELAND PLATINUM HOLDINGS LTD XSTRATA PLC 987.44 ARIZONA STAR RESOURCE CORP BARRICK GOLD CORP 793.38 RIO NARCEA GOLD MINES LTD LUNDIN MINING CORP 776.77 BOLNISI GOLD NL COEUR D'ALENE MINES CORP 764.25 WITS BASIN PRECIOUS MINERALS EASYKNIT ENTERPRISES HOLDING 601.29 CUMBERLAND RESOURCES LTD AGNICO-EAGLE MINES 524.58 VENEZUELAN ASSETS RUSORO MINING LTD GOLD FIELDS LTD 506.56 MULTIPLE TARGETS ANOORAQ RESOURCES CORP ANGLO PLATINUM LTD 499.37 PENASQUITO SILVER MINE SILVER WHEATON CORP GOLDCORP INC 485.00 GRD LTD TRANSFIELD SERVICES LIMITED 432.17 PALMAREJO SILVER AND GOLD CO COEUR D'ALENE MINES CORP 409.36 HERALD RESOURCES LIMITED Tango Mining Pte Ltd 368.09 AGINCOURT RESOURCES LTD OXIANA LTD 323.15 HERALD RESOURCES LIMITED BUMI RESOURCES TBK PT 321.61 PEAK MINES LTD PEAK GOLD LTD GOLDCORP INC 293.74 EURASIA GOLD INC KAZAKHMYS PLC 260.45 PORGERA GOLD MINE BARRICK GOLD CORP EMPEROR MINES LIMITED 250.00 TASIAST GOLD MINE RED BACK MINING INC LUNDIN MINING CORP 225.00 ESSAKANE PROJECT OREZONE RESOURCES INC GOLD FIELDS LTD 224.41 BALLARAT GOLDFIELDS NL LIHIR GOLD LTD 219.49 PERSEVERANCE CORPORATION LTD NORTHGATE MINERALS CORP 212.10

Source: Zephyr Database, own research

Most recently Lihir Gold has offered USD 1bn to take over the small West African competitor Equigold, whose cash costs per ounce are as low as USD 330. New Gold reported the merger with Metallica Resources and Peak Gold, and China Gold Group bought a stake in the Canadian Jinshan Mines. According to Peter Munk, CEO of the market leader, Barrick Gold, companies with proven reserves of at least 2 million ounces were on the "menu" of the majors.

The following production figures of the ten largest gold producers highlight the dire straits the large producers are in: Six out of the ten largest companies produced fewer ounces of gold in 2007 than in 2004. This is another reason for the expected industry consolidation.

Special Report Gold, June 2008 Page 45 GoldSpecial mining Report shares

Annual mining production in thousands of ounces

# COMPANY 2004 2005 2006 2007

1 Barrick Gold 8610 9095 8647 8056

2 Anglogold Ashanti 6407 6166 5634 5473

3 Newmont Mining 6989 6966 5871 5285

4 Gold Fields 4469 4411 4183 3965

5 Goldcorp 1361 1581 2125 2293

6 Freeport McMoRan 1441 2792 1737 2211

7 Harmony Gold 3428 2590 2344 1905

8 Newcrest 868 1427 1534 1758

9 Kinross Gold 1846 1866 1822 1627

10 Zijin Mining 420 496 1584 na

Sources: Company data, Bloomberg

Conclusion

We expect the industry consolidation therefore to continue in 2008 and envisage even higher volumes of take-over activities than in the previous years. The most interesting take-over targets are the mid-tier producers and explorers that are on the verge of production.

Special Report Gold, June 2008 Page 46 TechnicalSpecial Report analysis of the gold sector

Seasonality

Indian wedding season One reason for the most recent correction of the gold price is the pronounced and Christmas as seasonality of the price. Said seasonality is not the least due to the so-called reasons for strong wedding season as well as the Diwali Festival in India. Since people in India get seasonality married mainly in spring and autumn, the jewellery industry stocks up on material in the third and fourth quarter. The climax and end of the wedding season is May 7th, the day of the Akshaya Tritiya Festival. In addition, jewellers tend to stock up on gold for Christmas in the third and fourth quarter.

Distribution of highsand lows since 1980

Monat High Low January 6.84 5.64 February 12.43 12.89 March 11.4 11.96 April 9.12 6.78 May 4.6 6.98 June 9.18 9.88 July 10.32 9.71 August 9.3 11.87 September 8.62 5.74 October 5.8 5.84 November 2.34 6.78 December 10.05 5.93 Total 100 100

Source: Bloomberg, JCF, own calculations

This is why the fourth and the first quarter show the best performance of the year. In the second quarter the price tends to correct significantly, and in the third quarter it would usually move sideways. This seasonality has been true for 75 to 80% of the cases.

Seasonality on annual basis

120 118 116 114 112 110 108 106 % 104 102 100 98 96 94 92 90

Mai Juli März April Juni Jänner Februar August Oktober September November Dezember

Mean 1975-2008 Mean 2000-2008 Mean 1975-1980 Mean 1980-2000

Source: JCF, Datastream, own calculations

Special Report Gold, June 2008 Page 47 SpecialTechnical Report analysis of the gold sector

The following chart shows the average monthly changes of the gold price since 1992:

Average monthly change since 1992 in %

9% 8% October 7% September 6% January

5% February May 4% April 3% December November 2% July 1% 0% -1% June -2% -3% August

-4% March

Source: JCF, Datastream, own calculations

The following chart illustrates the monthly volatility of the gold price since 1992. Clearly, volatilities reach their peak in June and subside thereafter:

Average monthly volatility since 1992

22% 20% 18% 16% 14% 12% 10% 8% 6% 4% May July April June March August January October February November December September Source: JCF, Datastream, own calculations

The seasonal pattern has been confirmed this year in March, with the price backing down from the all-time-high of USD 1,030 from mid-March, and recovering temporarily in April, without any sustainable substance though. Should the distinctive seasonality of the gold price continue to hold, the end of June and the beginning of August would be good times to invest.

Special Report Gold, June 2008 Page 48 SpecialTechnical Report analysis of the gold sector

Comparison of the current correction with the end of the bull market in 1980

In January 1980 the gold price climbed by more than 50% within a short period of time to its then all-time-high of USD 850 per ounce. Subsequently the price fell by 30% and remained in a state of lethargy for 20 years. Will the slump of 1980 repeat itself?

In contrast to 1980, we have had a continuous increase in steps since the turn of the millennium, which supports the notion of a sustainable paradigm shift. In 1980 the increase was mainly fuelled by speculation, whereas today it is sustained by more and different market players and is based on a structural supply/demand deficit. In addition, we have not seen the "blow-off top" yet, i.e. a parabolic increase within a short period of time (similar to 1980), which is a common sight in the commodity segment.

Gold Bullion LBM U$/Troy Ounce 1972 - 1982

930 830 730 ~ + 2,000 % in 10 years 630 530 430 330 230 accelerated trend 130 30 01/1972 01/1973 01/1974 01/1975 01/1976 01/1977 01/1978 01/1979 01/1980 01/1981 01/1982

Gold Bullion LBM U$/Troy Ounce GOLDBLN Source: Datastream

Gold Bullion LBM U$/Troy Ounce 2001-2008

1100 1000 900 800 ~ + 330 % in 7 years 700 600 500 400 300 constant, steady increase in steps 200 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 07/07 01/08

Source: Datastream

Special Report Gold, June 2008 Page 49 SpecialTechnical Report analysis of the gold sector

A look at the price chart since the beginning of the bull market illustrates that corrections of up to 25% are not unusual. We therefore regard the current decline as healthy intermediate correction of an intact upward trend. A trend reversal would be the case if the price fell below USD 700.

Corrections since the beginning of the bullmarket

1050 -15 % 950 850 - 9.1% 750 - 25 % 650 550 - 11 % - 15 % 450 - 13 % 350 250 01/2001 07/2001 01/2002 07/2002 01/2003 07/2003 01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008

Source: Datastream, own calculations

Sentiment

After a 20% increase in 2008 the gold price embarked on an urgently needed technical correction. The numerous dojis in the weekly chart had already indicated the correction. Due to the hefty overshooting of the sentiment indicators, the setback was only a question of time. The market participants had suffered from the proverbial gold rush, as the positioning of 97% (DSI) and 93% (Market Vane Bullish Consensus), respectively, was bullish. The fact that an increasing number of gold recommendations had made it into the mass media represented a reliable counter- indicator as well.

The following chart clearly shows that the increase from the end of 2007 to the all- time-high in March was driven by overly positive sentiment. After the correction the overbought scenario changed noticeably, which means that the current price level seems well-supported on the downside.

Special Report Gold, June 2008 Page 50 SpecialTechnical Report analysis of the gold sector

Sentiment-Analysis

CMX GOLD 100 (COMPOSITE) Continuous (862.900, 870.400, 862.900, 868.500, -15.2000) 1000 900

800 700

600 500

400

PUBLIC OPINION - GOLD (65.6000, 65.6000, 65.6000, +0.000) 90

80

70

60

50

40 Copyright 2008, All Rights Reserved www.sentimenTrader.com 2005 2006 2007 2008 Source: www.sentimentrader.com

Commitment of Traders The Commodity Futures Trading Commission (CFTC) publishes weekly information (CoT) with insightful on long and short positioning. In the so-called Commitment of Traders (CoT) Report, indications the market participants are broken down into three categories:

1)Commercial hedgers:

z Large traders using futures contracts to hedge the risk (e.g. gold producers, jewellery manufacturers). z Often called "smart money", as these market participants have the most thorough knowledge of the framework and possibilities. z Anti-cyclical behaviour z Turning points tend to be identified correctly

2)Large speculators:

z This group mainly consists of institutional investors (banks, clearing houses, hedge funds) z Positions are opened due to speculative interest z Usually trend followers z Often late at trend reversals

3)Small speculators:

z Small traders z Often called "dumb money" z Reporting limits not exceeded z Trend followers z Good counter-indicator in the case of extreme values

Special Report Gold, June 2008 Page 51 SpecialTechnical Report analysis of the gold sector

The net position is arrived at by subtracting the open short contracts from the long positions. The red and green bands, respectively, represent 2 sigmas of the one-year average. The absolute values are an additional source of reliable signals. The net positions of the commercials were at a many-years low at the end of 2007/beginning of 2008, heralding the correction already. The latest increase should therefore have set a good floor in this area.

Reported net positions

CMX GOLD 100 (COMPOSITE) Continuous (865.800, 886.300, 865.800, 879.000, +13.6000) 950 850 750 650 550 450 350 GOLD COMMERCIAL NET POSITION (-177,597.0, -177,597.0, -177,597.0, -177,597.0, +0) -500

-1000 -1500 -2000 -2500

x100 GOLD LARGE SPEC NET POSITION (152,938.0, 152,938.0, 152,938.0, 152,938.0, +0) 25000

20000

15000

10000

5000

x10 GOLD SMALL SPEC NET POSITION (24,659.00, 24,659.00, 24,659.00, 24,659.00, +0)

40000

20000 Copyright 2008, All Rights Reserved www.sentimenTrader.com 2004 2005 2006 2007 2008

Source: www.sentimentrader.com

Traders like to use the CoT data in the decision-making process of their transactions, but they should not be the only criterion for decisions. After all, the CoT report only contains US futures markets and does not cover other countries or OTC options.

Special Report Gold, June 2008 Page 52 SpecialTechnical Report analysis of the gold sector

Short-term analysis

Our short-term analysis of the gold chart reveals three important constellations. In September 2007 the sideways trend that had lasted for almost 1.5 years was broken. In addition the US dollar index fell below its support line almost at the same time, which confirmed the buying signals. From that point on the dynamics of the trend were speeding up, resulting in a symmetrical triangle at the end of the year (in the weekly chart this came up as so-called flag; this formation is regarded as very reliable at forecasting the continuation of the prevalent trend). The breakout of said trend resulted in another price hike. The textbook breakout lead to the dynamisation of the trend, pushing the chart above the all-time-high of USD 850 and later even beyond the infamous USD 1,000 threshold. Round numbers tend to invite sell-offs, and the sentiment was clearly overshooting at that stage. The so-called shooting star pattern had indicated the correction for a while. During this correction both support lines at USD 959 and at USD 937 were vehemently broken, yet no trend reversal occurred, as the massive support zone around the old all-time-high of USD 850 turned out to be a solid floor.

A shoulder-head-shoulder formation has emerged since the beginning of 2008, i.e. basically a bearish formation, with a target of USD 730. However, recently the chart has gone through the re-break of the so-called neckline, indicating the robustness of the current trend and representing a bullish signal. Since the neckline is situated in the massive support area of USD 850, we tend to expect a bullish scenario. A rise beyond USD 950 would trigger a strong buying signal. The Fibonacci projections yield short-term targets of USD 1,033 and 1,211, or in an extreme case, 1,398.

Short-term view

1050 H 1000 950 S S 900 850 800 750 700 650 600 550 500 05/2006 07/2006 09/2006 11/2006 01/2007 03/2007 05/2007 07/2007 09/2007 11/2007 01/2008 03/2008 05/2008

Source: Datastream

The downside potential is currently at USD 850. If the downstream support area of USD 833 - 845 (which further supported by a Fibonacci level) were broken, the correction target would be USD 770. Lower support lines are situated at USD 730 and 710. Below that there is a massive support around USD 695 - 700. Even this kind of correction would not endanger the primary upward trend in place since 2001. Only a sustained fall below these supports would constitute a clear signal for a trend reversal and indicate the end of the current gold bull market.

Special Report Gold, June 2008 Page 53 SpecialTechnical Report analysis of the gold sector

Long-term analysis

The long-term chart shows that the years of the gold bear market have only ended recently. The gold price has established a long-term upward trend and embarked on an accelerated upward trend in 2006. A long-term consolidation and correction, respectively, would even support the overall very robust technical picture in the long run, because the overbought scenario would ease off and could thus lay the foundation for a new boost of momentum.

Gold price 1968-2008

1000

900

800

700

600

500

400

300

200 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gold 20 W MA Source: Datastream

The next hurdle of USD might be a tricky one, but beyond that there is enough upward potential. The Fibonacci projections of this bullish scenario are USD 1,219, 1,426, 1,816, and 2,000.

A negative scenario would entail a possible fall below USD 800 or 790. But even the testing of the May 2006 high of USD 730 could not be excluded over the course of the next couple of months.

The following overview illustrates that while the current bull market has been running for longer than average, the percentage change has not seen the extreme end so far. This would lead as to conclude that the current bull market is driven by a much larger variety of factors, in other words it is resting on a broader base.

Special Report Gold, June 2008 Page 54 SpecialConclusion Report and outlook

Secular bull market still In spite of the recent correction the yellow precious metal remains in a secular bull intact, opportunities market. The positive fundamental outlook will presumably not change a lot over the outweigh risks rest of 2008 and beyond.

But the gold price is clearly driven by two parameters:

a) the shape the financial markets are in and, in connection, the level of interest rates, the inflation expectations, and the scenario of the currencies

and

b) the status of the real economy and thus the situation of production and of demand (as mainly determined by the jewellery industry)

Since the relevance of gold in an industrial context is very limited (as opposed to copper or oil), the price depends much more crucially on the status of the financial sector (in the short run).

The following factors support the scenario of a continued rise in the gold price:

z The tense constellation of supply and demand will not improve in the medium term. Only the dramatic decrease in gold imports from India or a fast expansion of production could change this setting. But from today's perspective, this seems unlikely. z The continued fall in primary production and the increased demand from central banks in the emerging markets should lend further support to the price. Jewellery demand from emerging markets should record a long-term increase as well. The gap between supply and demand will widen progressively and cannot be closed by recycling or central bank sales anymore in the future. z Due to the massive loss of trust on the capital markets and the still smouldering dangers from inflation, the crisis-proof metal should remain in high demand over the coming months. z Gold and precious metals are the only assets class capable of retaining its value in inflationary and deflationary settings on a sustainable basis. z The fast expansion of production capacities seems unlikely. Although the gold price has increased by 400% over the past years, many companies still find it hard to achieve profits. The drastic rise in production, energy, and staff costs has more than made up for the gold price increase in some parts. In addition, the easily minable reserves are largely exhausted, which means that mining operations are going deeper and deeper and thus production becomes more expensive. This should provide the gold price with solid support. z According to the IMF, foreign exchange reserves increased between 1997 and 2007 from USD 1.4 trillion to USD 6.4 trillion. If the central banks in Russia, China or the Arabic region wish to diversify their portfolio of reserves more aggressively out of their dollar dependence, gold investments should record a considerable inflow. z We regard the significant rise in mining costs as robust support against gold price decreases. Many deposits cannot be profitably mined below a price of USD 600 per ounce. This means that any price lower than that would automatically curtail supply. z The fact that institutional investors, state funds, and oil-producing countries are still underweighted in commodities and particularly in gold would argue for a sustainable increase in demand.

Special Report Gold, June 2008 Page 55 SpecialConclusion Report and outlook

z Commodities will become more important as asset class within the framework of strategic asset allocation over the next couple of years among private investors as well due to the aforementioned characteristics. z The gold price will be supported by a range of additional factors. The credit crisis is not over yet, and the US macroeconomic data are ambivalent. The problems on the US housing markets are actually getting worse. z Because of the latest crisis people seem to remember the actual benefits of gold. The remonetarisation of gold has begun. z In order to combat the current problems the Fed (and in the event also the ECB) will be forced to cut interest rates even further or keep them at low levels, respectively. Traditionally, negative real interest rates and the gold price have displayed a strong correlation. The opportunity costs of holding gold, i.e. the loss of interest income, decrease as interest rates fall. The lower yields are, the less attractive bonds become vis-à-vis gold. The primary driver of the gold bull market, i.e. negative real interest rates, should therefore constitute a positive basis for the gold price in 2008 and beyond.

Real interest rates vs. gold price

11 1000 10 9 900 8 800 7 6 700 5 4 600 3 500 2 1 400 0 -1 300 -2 1971 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1995 1997 1999 2001 2003 2005 2007 -3 200 -4 100 -5 -6 0

real interest rate Gold Bullion LBM U$/Troy Ounce

Source: Bloomberg, Datastream

Currently only massive interest rate hikes could weaken the gold price in the long term. But in contrast to the situation in 1981, this seems unlikely to happen. At the end of the 1970s the period of high inflation in the USA could only be remedied through massive interest rate hikes by then-chairman of the Fed, Paul Volcker. Nominal interest rates were at 20%, while real rates were at 8%. The USA was net creditor and had a positive trade balance in 1980, but the situation has reversed in the meantime. Private household debt and public debt have reached alarming levels. Therefore an imminent rate increase under the current chairman seems unlikely - a scenario that should lay a solid foundation for future gold price increases.

Special Report Gold, June 2008 Page 56 ConclusionSpecial Report and outlook

We would seize the current opportunity of general profit taking to buy as soon as the short-term downward trend is over.

The following risk factors could have a long-term negative effect on the gold price:

z A falling oil price could cause the gold price to ease off. Also, we cannot fully exclude that mining companies will decide to hedge their future production again.

z Given their current levels, jewellery demand will probably come down, and recycling supply will rise drastically. Whether or not the investment demand for bullions, coins, and paper gold can close the gap, is difficult to project.

z A severe and long-lasting recession would dampen the demand for commodities and absorb the inflationary pressure. Gold would display weakness in such a scenario.

z Even though the positive correlation with the US dollar has recently shrunk quite a bit, weeks of technical rebound of the greenback would certainly have a negative knock-on effect on the gold price.

Therefore the fundamental analysis leads us to conclude that the gold bull market of the past years is based on tangible causes that really exist. However, the almost exponential increase in the gold price recently was mainly due to the current financial crisis.

The gap between supply and demand can only be compensated by price increases The combination of inflation, weak dollar, oil boom, and economic and political uncertainty has set the stage for rising gold prices. Therefore we still rate the risk/ return ratio of gold investments very positive and expect higher price levels in the medium term. That said, the downside risk has increased drastically since the publication of our previous report.

We do not expect the bull market to come to an end in the foreseeable future given that the market rests on a more solid base than the previous huge bull market in 1980. The massive support at USD 850 has so far proven robust. From a seasonality perspective, June tends to be a bit dodgy for the gold price, and a sideways movement within a band of USD 850 - 950 until the end of summer seems quite realistic.

Due to the above mentioned factors we still see an attractive opportunity / risk profile. We regard the current consolidation as good buying opportunity and envisage higher gold prices in the medium to long term. The infamous USD 1,000 per ounce threshold should be clearly passed again in 2008, and positive seasonals should lend further support to the price from the third and fourth quarter. We believe that gold investors will encounter a highly attractive opportunity / risk profile in 2008 and beyond. Passing USD 1,200 is the first target, and in the long run the price may well pass the inflation-adjusted all-time-high of USD 2,300.

"Gold is money, and nothing else!"

JP Morgan, 1913 in front of the US Congress

Ronald Peter Stoeferle

Special Report Gold, June 2008 Page 57 Special Report

Published by Erste Bank der oesterreichischen Sparkassen AG Neutorgasse 17, OE 543 A-1010 Vienna, Austria. Tel. +43 (0)50100-ext. Erste Bank Homepage: www.erstebank.at On Bloomberg please type: ERBK . This research report was prepared by Erste Bank der oesterreichischen Sparkassen AG (”Erste Bank”) or its affiliate named herein. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgement on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, Erste Bank or its affiliates or the principals or employees of Erste Bank or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Erste Bank or its affiliates or the principals or employees of Erste Bank or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on the securities referred to herein may be obtained from Erste Bank upon request. Past performance is not necessarily indicative for future results and transactions in securities, options or futures can be considered risky. Not all transaction are suitable for every investor. Investors should consult their advisor, to make sure that the planned investment fits into their needs and preferences and that the involved risks are fully understood. This document may not be reproduced, distributed or published without the prior consent of Erste Bank. Erste Bank der oesterreichischen Sparkassen AG confirms that it has approved any investment advertisements contained in this material. Erste Bank der oesterreichischen Sparkassen AG is regulated by the Financial Services Authority for the conduct of investment business in the UK. Please refer to www.erstebank.at for the current list of specific disclosures and the breakdown of Erste Bank’s investment recommendations.

Special Report Gold, June 2008 Page 58 SpecialContacts Report

Group Research

Head of Group Research Mihai Caruntu (Equity) +40 2 1311 - 2754 Friedrich Mostböck, CEFA +43 (0)5 0100 - 11902 Dumitru Dulgheru (Fixed income) +40 2 1312 6773 - 1028 CEE Equity Research Cristian Mladin (Fixed income) +40 2 1312 6773 - 1028 Co-Head: Günther Artner, CFA +43 (0)5 0100 - 11523 Loredana Oancea (Equity) +40 2 1311 - 2754 Co-Head: Henning Eßkuchen +43 (0)5 0100 - 19634 Raluca Ungureanu (Equity) +40 2 1311 - 2754 Günter Hohberger (Banks) +43 (0)5 0100 - 17354 Research, Slovakia Franz Hörl, CFA (Steel, Construction) +43 (0)5 0100 - 18506 Head: Juraj Barta (Fixed income) +42 1 25957 - 4166 Gernot Jany, CFA (Banks, Real Estate) +43 (0)5 0100 - 11903 Michal Musak (Fixed income) +42 1 25957 - 4512 Daniel Lion (IT) +43 (0)5 0100 - 17420 Maria Valachyova (Fixed income) +42 1 25957 - 4185 Martina Valenta, MBA (Transp., Paper) +43 (0)5 0100 - 11913 Christoph Schultes, CIIA (Ins., Util.) +43 (0)5 0100 - 16314 Research, Ukraine Vera Sutedja, CFA (Telecom) +43 (0)5 0100 - 11905 Viktor Stefanyshyn (Fixed income) +38 044 593 - 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84225 Martina Fux +43 (0)5 0100 - 84113 Treasury Domestic Sales Michael Konczer +43 (0)5 0100 - 84121 Head: Gottfried Huscava +43 (0)5 0100 - 84130 Ingo Lusch +43 (0)5 0100 - 84111 Corporate Desk Ulrich Inhofner +43 (0)5 0100 - 84324 Head: Leopold Sokolicek +43 (0)5 0100 - 84601 Karin Rauscher +43 (0)5 0100 - 84112 Alexandra Blach +43 (0)5 0100 - 84141 Michael Schmotz +43 (0)5 0100 - 84114

Special Report Gold, June 2008 Page 59 Special Report

Notes

Special Report Gold, June 2008 Page 60